When Will Volatility Return to the Markets?

Oct 30, 2012, 06:00 ET from Capital Spreads

LONDON, October 30, 2012 /PRNewswire/ --

For some reason an increase in volatility for traders is like giving candy to a child in that they simply cannot resist but to jump into the market with both feet to try and get a piece of the action.  If that wasn't enough the adrenaline pumped spread better, rather like the sugar fuelled child, can become hyper active and start trading far more frantically than they normally do.

At Capital Spreads it is uncanny how close the correlation is between volatility and trade numbers.  When volatility increases so do trade numbers whilst at the same time the average stake size tends to decrease as clients are getting more bang for their buck.  So when the markets start moving wildly clients are rushing to chop and change or even hedge positions that they might have in a frantic effort to either take advantage of a particular move or protect themselves against adverse movements in the markets.

It's the indices that tend to attract the most business during volatile times and usually at the expense of FX markets, our next most popular asset class.

Unfortunately, discipline tends to go out the window with clients possibly being caught out by one particular move in a short space of time and then they over trade in order to make their losses back, but simply make their wounds deeper by taking on more losing trades.  During times of extreme volatility traders are probably better off sitting on the sidelines waiting for the waters to calm.

Recently though volatility has been very low.  If you look at the Vix index, a measure of S & P 500 index option volatility, also known in the markets as the fear gauge, it is at some of its lowest levels of recent times.  This not only means that there's less volume going through the systems, as is seen across all sectors of the market not just spread betting and CFD providers, but it makes trading conditions much easier for clients since the markets have been so range bound.  They might find themselves offside on a trade but don't have to wait long for the market to come back in their favour so running losses for now seems to be a thing of the past.

Volatility can't remain like this for ever, after all things move in cycles and so at some point there will be an increase in the big swings.  As mentioned this is where clients find conditions more exciting but at the same time far more challenging.  At Capital Spreads we provide different instruments to assist in mitigating risk such as guaranteed stop orders which are offered specifically to help protect clients against market slippage which can occur quite regularly in very volatile markets.  There are also trailing stops which will follow a winning position automatically if the market goes in a client's favour, so with these order types risk can be managed effectively.

There are also our free trading tools to assist clients in their trading decisions such as the technical analysis section provided by award winning Trading Central, the economic calendar from Digital Look and the live market squawk from Talking Forex.  These suppliers are also teaming up with us to provide some really insightful webinars so check out our seminar section on our homepage to sign up and get educated.

While LCG attempts to ensure that the information herein is accurate at the date the information was produced, however, LCG does not guarantee the accuracy, timeliness, completeness, performance or fitness for a particular purpose of any of the information provided herein and under no circumstances are they to be considered an offer, solicitation to invest or be construed as giving investment advice.

SOURCE Capital Spreads