How To Profit From High Volatility

By Chris Blanchet

Investors who have had money in the markets over the past two years will not be surprised to learn that since June 2007, the volatility index has risen from 16 to a little more than 79, the highest levels recorded in history.

To put that number into perspective, consider that after September 11, the index reached 33. Now, in the 30 range, the market seems subdued! Overall, however, 30 remains a high number as far as volatility is concerned and this is where many investors stand to profit.

The first thing investors need to do when it comes to taking a run at profit is to distance themselves emotionally from their investments. Trading software that provides signals on when to buy and sell can help in this regard, but this is something most individual investors are unable to accomplish. Think about it: we all work hard for our money and we hate to see it wasted. This is a benefit that money managers have -- they haven't worked hard for the money you invest, so if they lose, they lose your money, not theirs.

Secondly, the investor should have a good understanding of volatility. Reviewing the charts at Yahoo! Finance by typing "^VIX" in the quote box is a good start. Another essential is to understand the definition of volatility, which is simply "rate of change of the deviation from the mean." The higher the volatility, the more quickly will stray from its mean.

The last thing an investor needs to do is tame the beast known as greed. This is a difficult thing to do since short term returns give us a taste of just how much we might make if we stay invested just a little longer for just a little more money. By using trading software, investors are better able to remove the emotion since the software will study concrete factors like volatility, moving averages, momentum, and so on whereas investors study the profit and potential for more.

In summary, by eliminating emotion and relying on technical trends investors can use volatility advantageously. Such volatility can allow for strong gains and returns when used properly. A trading system can assist to a large degree, but is not at all required for investors who can control their emotions and greed. - 31987

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