5 Ways to Hedge against Stock Market Volatility

Unpredictability and too much volatility are two things that most people are scared of in the stock market. Simplifying things, these are thought of and considered as risks. However, intelligent traders know how to minimize these risks and sometimes make it work in their favor. The stock market’s unpredictability and volatility are inevitable, they are and will always be a part of the stock market.

So what are the things that you must do in order to protect your equity against the stock market’s high volatility? Here are 5 ways how.

1.) Avoid day trading. In the stock market, if the risk-reward ratio is high, its potential return is high as well. However, the associated risk along with it is also very high. The easiest and most effective way to avoid the risks of the high volatility in the stock market is to buy a certain stock and hold it for a long time. This strategy is used by many “buy-and-hold” traders or in other words, investors. There is also a group that is called “swing traders” or traders that buy a certain stock and hold it for a short time (a few days to a few weeks) and sell it. The concept of swing trading is all about taking advantage of the short but strong momentum of stocks. Whether you buy and hold stocks for a long time or swing trade a stock, it can result to significant gains. Give the stocks that you hold some allowance to grow and be patient. Day trading is the most riskiest among all and is the most affected by the ups and downs of the stock market. Day traders buy and sell stocks everyday. This type of trading has a higher risk ratio than reward.

2.) Study and investigate stocks. The stock market is not some sort of magic wand wherein you buy shares and it quickly gives you instant profit. If you do your homework well, have some guts, follow your trading plan, and probably have some little luck, you can gain quick profits. One very common trait that successful traders have is that they are all diligent in finding stocks that have good potential. Study and understand financial statements, read news, and participate in different stock market forums. These are a few things that you can do in order to pick the right stocks.

3.) Learn technical analysis. Technical analysis is all about reading, understanding, and interpreting charts. Most short term traders use technical analysis a lot. They believe that everything is being discounted in the price and the charts. Though technical analysis is not a 100% sure way for you to earn and be successful in the stock market, it can help you a lot and minimize the risk that you face. How does technical analysis or charts help you? First, you get to see which stocks has the strong price actions. Stocks with strong price actions normally last for days or even weeks. Second, you get to see which stocks have strong momentum or could possibly predict which stocks will soar through leading indicators. Third, you get to see its historical price action. Its price history is very important in predicting future values.

4.) Pick large cap stocks or blue chip stocks. Though the stock market is very volatile, there are still stocks that move relatively slow and can be considered safe stocks. These stocks are normally large cap stocks or blue chip stocks. Why do these stocks move slower compared to other stocks? First, they’ve got more shares compared to other companies hence, it will take some time for its price to move. Second, there are lots of buyers and sellers in one particular price. For its price to move up, all the offers and bids must be done on a certain price level first. Third, large cap stocks are harder to manipulate than penny stocks hence they normally stay long on a certain level before going up or down. Large cap or blue chips stocks go up in time hence irregardless of its volatility, it will still gain especially if the economy or the overall market is bullish.

5.) Learn the three legged stool in the stock market. Technical analysis, fundamental analysis, and market sentiment are the three ingredients for a price to go up or down. Technical analysis is all about reading and analyzing charts, fundamental analysis is all about a stock or a company’s fundamentals such as financial reports, disclosures, news and reports, and even management. Market sentiment is all about the overall market interest in the stock. If all three are present in a certain stock, buy it if it indicates bullish or upward momentum. If one is lacking, share prices may not rise unless if it is being pushed by a jockey. Jockeys are one of the reasons why there is too much volatility in the stock market. If those three factors are present, jockeys might be irrelevant or in fact, they could help make the stock realize its full potential.