Your questions about volatility

How can I take advantage of market volatility as a trading opportunity?

First, make sure you're mentally prepared to manage the risks involved with trading in volatile markets and firm up your trading plan.

Then, focus on stocks trending with the market. Watch for stocks that are breaking through their usual resistance level--when prices are moving rapidly, an upside breakout can be followed by an immediate and substantial run to higher prices. At the same time, a reversal from a false breakout can come very quickly, so consider a stop-loss order to potentially limit your loss in case the price falls a certain distance below the breakout point. (Stop-loss orders can only potentially limit losses because there are no guarantees that stop orders will be executed at or near the stop price.)

Last, consider shorter-term strategies to exit trades quickly--since profits in volatile markets can vanish and turn into losses faster than you expect. For more details on all these strategies, read How Traders Can Take Advantage of Volatile Markets.

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Where can I hold my cash when markets are volatile?

It depends on how you plan to use the cash. There are two primary categories: (1) everyday cash and (2) savings and investment cash.

• Everyday cash is money that is needed for day-to-day expenses, paying bills and quickly placing trades. Typically ease of access is of top importance. You can consider holding this money in a checking account or in the uninvested part of a brokerage account.
• Savings and investment cash is money that is needed for an emergency fund (3 to 6 months-worth of expenses), short-term goals and/or as a long-term investment in a diversified portfolio. A competitive return (yield) may be more important than cash management features or immediate access. Options include a high-yield savings account, purchased money funds or certificates of deposit (CDs).

For more information, read Where Should You Hold Your Cash?

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