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Browse Topics:    Trading Strategies    Research & Analyze    

Trader Q&A: Why is Having an Understanding of Volatility a Benefit to Traders?

Robert Kmec discusses his thoughts on the importance of understanding volatility.

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Well volatility benefits every type of trader, especially an equity trader. Two things that come to mind are opportunity and risk. You know, with volatility that means things are moving around, and that provides equity traders the ability to buy and sell. You know, get in, get out, make money, that’s how we make money. But it also helps us with risk. You know, when we have volatility and you have an understanding of that, you then now begin to understand how much risk you are taking and we can start quantifying that. So you can look and say, ‘Hey, this stock may be more volatile than what I’m willing to even participate in, because if I’m wrong I’m taking a much bigger loss than ever I’d really want to.’ So maybe you want to shy away from a stock like that.

So we can start gauging, then, ‘Hey, what’s an appropriate investment vehicle or a trade vehicle for me?’ ‘Is it too volatile?’ ‘Is it not volatile enough?’ So understanding that and being able to quantify that allows us to start selecting securities that fit our own personality for trading, and that’s a big key-in. So understanding that helps us figure out what we want to trade and that fits our own individual risk tolerance.


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