Don’t Let Fear Rule Decisions In Volatile Markets
Market volatility is likely to continue in 2012 and traders can best equip themselves by understanding how the market responds to events and not acting in a knee-jerk fashion.
CMC Markets head of analysis and education, David Land, has analysed volume and trading data over the past year to form three top themes to help traders in the year ahead:
• Theme one: price versus volume. The past year has shown us volume and price are not always linked and in fact while volumes have increased, the dollar value per transaction has slowed. Therefore it is important for traders to realise the value of turnover, not turnover levels, is the most accurate gauge of how much actual money is moving in the market.
• Theme two: Trading conditions have changed over the decade. It’s easy to think there is above average volatility at the moment, but while there has without doubt been some significant spikes in the past few months, overall average market moves over the long term have not been that variable.
• Theme three: Misery loves company. An analysis of price versus volume in 2011 shows downwards spikes in the share market correspond with upward spikes in volume. What this means is traders are getting out of the market due to fear, when what they are actually doing is exiting when the market is at a low – at the worst time.
“The trading world is likely to remain turbulent and difficult to navigate in the year ahead and predicting periods of volatility will be virtually impossible,” he says.” The best thing a trader can do is arm themselves with solid knowledge of how the market responds to events and understand they are part and parcel of the share market. They should avoid making trading decisions based on fear.”