16 May 2016

Making use of Market Volatility

Most of the traders especially the day traders or swing traders make use of the market volatility to make money from the financial market.

For example if the price of a particular stock swing from $0.90 to $1 within a time frame of few minute, few hours or few days, depending on the trade amount, one can make about $100 - $1000 if one trade size is (1,000 to 10,000) shares. By using a capital outlay of only $900 - $9000.

However trading does not come without risks. In order to mitigate the risk from using the same amount of capital, one should make use of the market volatility to its own advantage.

For example, if one already evaluate a particular company and deemed that the price is at a safety margin range to buy, one could do the followings:

Share A has an intrinsic value of $3 and because of the market volatility, it has fallen to $2.50. Imagine you only have an investment capital of $5000, you could buy 2000 shares.

When the market pushes up Share A price to say $3.20 (for example), you could sell it for $6600. As the market is in downtrend and there are volatility, one can then wait for the price to drop again. When the market has pushed down Share A price to $2.80 (which is below its intrinsic value), you can then buy 2300 shares ($6600 / $2.80 = 2357.14).

Notice that you "gain" additional 300 shares without additional funds.

You can thus repeat the cycle over and over again which could let you own more shares overtime without additional capital outlay.

Adopting this strategy thus allowing you to own more shares with the same cost of investment capital in times of market volatility.

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