Every week we provide insights into popular assets and hot questions, so you can easily learn more about the investment market in bite‑sized pieces.
In this Markets in Focus, we take a closer look at volatility - what it is, how it’s used in trading (especially in CFDs), and what drives it.
Understanding Volatility
What Is Volatility?
Volatility measures how much prices fluctuate over time. High volatility means rapid and significant price changes, while low volatility suggests more stable, gradual price movement.
A certain level of volatility is essential for traders - it brings opportunities. But how investors perceive it depends on their risk tolerance and strategy.
Volatility in CFD Trading
Volatility trading is especially common among CFD traders. Because CFDs let you speculate on price movements without owning the underlying asset, periods of strong price swings become prime opportunities.
- Short-term traders (like day traders) often use CFDs to benefit from intraday volatility - taking advantage of rapid swings to generate profit.
- Long-term traders may use CFDs for hedging, protecting their portfolios against downside risk during turbulent markets.
What Causes Market Volatility
Market volatility can be triggered by a variety of major factors:
- Economic announcements: Central bank decisions, interest rate changes, inflation data - all can quickly shift market sentiment.
- Political instability: Elections, regime changes, geopolitical conflicts introduce uncertainty.
- Natural disasters or crises: Unexpected events like hurricanes, earthquakes, or pandemics can create huge jumps in volatility.
- Investor behavior and sentiment: Emotions like fear and greed, herd mentality, and panic reactions amplify volatility.
Why Volatility Matters in Trading
- Opportunities for Profit: Volatile markets offer more entry points, breakouts, and potential for short-term gains.
- Risk Management: High volatility comes with higher risk - understanding volatility helps you tailor your stop-loss levels, position size, and tactics.
- Strategic Hedging: Traders may use CFDs or other derivatives to hedge against big swings, protecting their portfolios when markets go wild.
Final Tip for Your Trading Week
We wish you a successful trading week on the Change App - whether the markets are calm or chaotic.
Use volatility wisely: don’t fear it, but respect it.
Until next week!
