What is Volatility? Derivative Trading Strategies During Market Volatility

Why Investors Need to Understand Price Volatility

Whenever the term “market volatility” is mentioned, many investors feel concerned. Stories about billionaires like Bill Gates or Jeff Bezos losing billions of USD during the Covid pandemic clearly demonstrate the power of price fluctuations. However, interestingly, strong volatility also presents profit opportunities for those who know how to leverage it.

If you are looking for effective trading methods in today’s unstable markets, this article will provide a detailed explanation of the concept of price volatility and how to use derivative tools like CFDs to profit from significant price swings.

What Is Volatility? A Detailed Definition

Price volatility (Volatility) refers to the degree of change in an asset’s price over a specific period. When prices increase or decrease continuously with large margins, making trend prediction difficult, it is called high volatility. Conversely, assets with stable prices, clear trends, and minimal sudden fluctuations are considered to have low volatility.

To assess an asset’s volatility, investors often use the VIX index developed by CBOE. The higher the VIX, the more likely the asset is to experience strong fluctuations with unusual price movements.

Why Is Market Volatility an Opportunity?

The fundamental principle of financial trading: To make money, there must be price movement.

When the market is highly volatile, prices often fall sharply, causing many investors to incur losses. However, for derivative traders—those who know how to use tools like CFDs—the more volatile the market, the greater the profit opportunities.

Analyzing Price Volatility of Major Assets

The Covid-19 period caused psychological instability among investors, leading to significant volatility across the entire market. Data comparing the VIX index of different assets shows:

Crude Oil - The Most Volatile Asset

• During stable economic periods: VIX index 25-45 points
• During Covid-19: surged to record levels
• Cause: volatility supplied from the US and Saudi Arabia regions

Gold - The Most Stable Asset

• During stable economic periods: VIX index 9-15 points
• During Covid-19: peaked at 45 points
• Exhibits more stability compared to other assets

Bitcoin - Highly Volatile Asset

• Current Bitcoin: $88.84K (+1.50% in 24 hours)
• Recorded a 1400% increase in less than a year during the Blockchain boom
• Volatility increased as investor interest grew

###Comparison Table of Profit Rates (First 6 Months of 2020)

CFD - Derivative Tools to Profit from Price Fluctuations

How Do CFDs Work?

CFD (Contract for Difference) is a derivative contract that allows you to trade the price of an asset without owning it physically.

Basic principles:

• Profit or loss is calculated based on the price difference between opening and closing the contract
• The broker will settle/pay the difference to you
• You can profit from both rising (Long positions) and falling (Short positions)

###Real Example: Short Selling Gold

Suppose you predict gold will decrease from the current level of $1943:

1. Open a Short Position (short sell) with 1 lot of gold
2. Use 1:100 leverage: only need $19.43 margin to trade 100 times your capital
3. Price drops to $1900 as predicted
4. Close the position: Profit = $1943 - $1900 = $43 per CFD

Comparison table:

###Advantages of CFDs

✓ Multi-asset trading: Forex, indices, commodities, cryptocurrencies without owning the assets

✓ Profit from both directions: Make money whether the market goes up or down, not limited to Long only

✓ Leverage trading: Up to $1 100x( leverage, amplifying profits

✓ 24/5 Market: Flexible trading according to your time zone

✓ Low costs: No need to own the actual assets, reducing trading expenses

Main Factors Causing Strong Volatility

Market News and Information Asset prices fluctuate sharply when news directly impacts supply-demand. Examples include new monetary policies, economic reports, or central bank decisions.

Liquidity The more interest an asset attracts from investors, the more active the trading, and the higher the volatility. Bitcoin’s 1400% surge in less than a year in 2017, when Blockchain technology gained fame, is a clear example.

Natural Factors and Pandemic Risks Natural disasters or pandemics can immediately halt the economy. The recent Covid pandemic caused a market crash due to global supply chain disruptions.

Supply and Demand Crude oil is a typical example—constant fluctuations due to information about supply from major producing countries.

Leverage Usage Assets that allow high leverage trading tend to have higher price volatility because short-term traders aim to reduce margin costs.

Profit Strategies During Strong Market Volatility

1. Avoid Excessive Risk Quickly cut losses on long-standing losing positions. Holding losses too long increases daily margin costs and the risk of total capital loss.

2. Always Set Stop-Loss Orders In volatile markets, prices can reverse 20-30% rapidly. Without a 5-10% stop-loss, leverage can amplify losses from 20% to 100%—losing all initial capital.

3. Maintain Trading Discipline Stick to your pre-defined strategy, stay focused, and be patient. Emotions are the biggest enemies in trading.

4. Monitor Market News Closely When volatility is driven by news, those with early information have an advantage in placing orders before major swings occur.

5. Study Historical Price Fluctuations Identifying past average fluctuation ranges helps predict potential volatility. For example, if gold typically moves ±1% daily, a change of ±3% without unusual news is very unlikely.

Price Volatility Analysis Tools

Technical Indicators Bollinger Bands, Keltner Channels, Stochastics, Average True Range )ATR, and other indicators help short-term traders understand market movements and adjust strategies accordingly.

Expert Analysis Brokerage firms provide trend and sentiment forecasts. You can also consult investment forums for shared experiences.

Track Most Volatile Stocks/Assets Use official websites like Bloomberg, FinViz, NASDAQ to find today’s most volatile assets.

Conclusion

Price volatility can be an opportunity or a risk, depending on each investor’s perspective and trading skills:

• Long-term value investors see short-term volatility as normal and ignore it
• Short-term traders seek profit from price differences during volatile markets

CFD derivatives are popular tools for investors aiming to capitalize on strong volatility phases. However, to succeed with CFDs, you need to:

• Understand how they operate
• Manage risks carefully when using leverage
• Have a clear trading strategy
• Always stay updated with market information

Strong market volatility is not necessarily a difficult time—it’s when disciplined traders with clear thinking can achieve high profits.