Trading and investing are driven by price movements in the market, as they determine the potential for profit. However, when these movements become too fast and unpredictable, they are considered volatile. While volatile trading may sound intimidating, it can also present various opportunities for traders, particularly those employing short-term strategies. With the appropriate knowledge and techniques, traders can capitalize on these rapid price movements. To assist you in achieving your trading objectives, we have created a comprehensive guide that details how to effectively utilize volatility.
What is volatility?
Volatility is characterized by the magnitude and swiftness of price movements. When these factors are high, the market is considered volatile. In such circumstances, the direction in which the price is moving becomes irrelevant, as prices may fluctuate rapidly in both upward and downward directions.
Volatility brings about uncertainty and complexity in trading, and can last for varying durations, ranging from a few days to several months or even years. Although volatility typically affects the general market, specific assets or groups of securities may experience it, including cryptocurrencies.
However, volatile markets or securities also present opportunities for traders to earn greater profits than usual. To best leverage these opportunities, it is necessary to understand the underlying reasons for the volatility.
What leads to volatility in cryptocurrency?
Several factors can cause volatility in cryptocurrency. Some examples are:
While not a direct cause, employment rates can have an impact on inflation volatility. This can lead to volatility in the financial market, as it reduces the purchasing power of a country as a whole. Studies show that countries with better employment regulations tend to suffer from less inflation as a result. These employment factors include coordinated wage systems and strong unions for workers.
Inflation and commodity prices
Inflation causes prices and interest rates to rise, and hyperinflation can cause them to skyrocket. Both of these factors have a significant impact on the financial market. When commodity prices increase, people have less capital to invest and trade.
Traders may sell off their assets, leading to a crash. Conversely, people may turn to cryptocurrency as a store of value, significantly increasing its prices and drawing attention from traders worldwide.
Although not a direct cause, employment rates can affect inflation volatility, leading to fluctuations in the financial market. Countries with better employment regulations, including coordinated wage systems and strong unions for workers, tend to suffer from less inflation.
Inflation and commodity prices
Inflation and high commodity prices can drive up interest rates and reduce capital for investment and trade. This can lead traders to liquidate their assets, causing a market crash, or to turn to cryptocurrencies as a store of value, potentially boosting their prices and drawing attention from traders worldwide.
Economic recession or growth
During an economic recession, companies may struggle to maintain profitability, leading to a decline in the stock market followed by sudden rises. Economic growth, on the other hand, can significantly increase the value of securities and attract more traders, even in the case of cryptocurrencies, which may be pegged to fiat currencies.
Cryptocurrencies usually publish their earnings publicly every quarter, causing increased volatility before, during, and after this time. Traders will try to prepare, predict, and protect their investments based on the new information provided, leading to potential fluctuations in the market.
A change in management
In cryptocurrencies, a change in the development team or founders can impact the features of the digital currency, potentially leading to changes in investments and volatility in the market.
The launch of new features or products related to a cryptocurrency can also cause volatility in the market. For instance, the Ethereum Merge in 2022 caused fluctuations in the prices of some cryptocurrencies.
Here are some rewritten tips on how to use volatile trading to your advantage:
Establish clear goals and risk management strategies
In order to successfully engage in volatile trading, it’s essential to have a clear understanding of your goals and risk tolerance. Setting measurable objectives and implementing measures to mitigate risk will not only safeguard your investments, but also prevent emotions from clouding your judgement.
To minimize risk when short-selling in a volatile market, it’s important to avoid trading too aggressively. You can use trade orders such as stop-loss orders and take-profit orders to manage your positions and limit potential losses. A good practice is to define your profit target as a percentage of your current holding, such as “my goal is to earn a 10% profit on my $100 worth of ETH”.
Refine your short-term trading strategies
Once you have set clear goals and risk management measures, you can refine your short-term trading strategies to take advantage of volatile price movements. For instance, you can sell a portion of your position when the price slightly increases and wait for a better opportunity to sell the remaining portion.
To maximize profits, you can also use a tighter trailing stop. A trailing stop is a type of stop order that is set at a specific percentage or price relative to the security’s current market price. A lower trailing stop will keep your position open for a longer time, while a higher one will result in a shorter position.
Use trade orders on every exchange
While day trading is a popular strategy for volatile markets, it’s not always feasible to constantly monitor your trades. Therefore, it’s important to use other types of trade orders on every exchange to minimize risk and optimize profits.
To make the most of market trends, it’s important to analyze and target cryptocurrencies that are currently trending. Look for ones that are experiencing an upward trend, wait for volatility to occur, and then make a purchase just before the value accelerates. Although there is always a risk of a fast decline, placing trade orders at the right time can lead to a faster profit.
One strategy is to buy at the breakout. Imagine the price movements of your chosen cryptocurrency as a 2D fish swimming through water. It can move up or down, and change direction quickly. When the fish swims closer to the surface (or the breakout), traders may grab onto it and pull it even higher. This represents a cryptocurrency that other traders have not yet noticed or are hesitant to buy. Once it hits an upward trend, traders may lose their resistance to buy and rapidly invest. Selling during this frenzy and leaving before the breakout loses momentum can be a great way to turn a profit safely.
Staying informed on the latest market developments is crucial. Ensure that the notifications on your financial applications are turned on. Review new data before making trading decisions, and search for the latest articles on the cryptocurrencies you are invested in. Lastly, use a volatility indicator to track market movements.
When it comes to choosing a volatility indicator for cryptocurrency markets, there are several options available.
CVI (Crypto Volatility Index) Chart
A decentralized volatility index, which is customizable for crypto traders, is now available for use. This tool is updated in real-time and can be used to hedge against impermanent loss. It was developed by Professor Dan Galai and is publicly accessible. It allows users to monitor the volatility of both USDC and ETH in the cryptocurrency market.
Bitcoin and Ethereum Historical Volatility Index
The BitVol Index and EthVol Index are two indices that measure the projected 30-day volatility of Bitcoin and Ethereum, respectively. These indices are derived from historical data on their tradable options. The Fear Gauge, on the other hand, displays data from 2020 onwards and can be utilized to analyze trends in cryptocurrency prices.
Crypto traders widely use this fear index to identify not only volatility but also potential entry and exit points. It’s an excellent tool to spot breakouts and make informed trading decisions. John Bollinger created this index, which employs three lines, or bands, to illustrate the moving average and positive and negative deviations. The index’s distinctive display helps crypto traders analyze market trends, identify oversold or overbought cryptos, and make trading decisions accordingly.
What are the most volatile hours for cryptocurrency trading?
Cryptocurrency markets are open 24/7, which means that volatility can happen at any time. However, historically, the most volatile hours are between 8 am and 4 pm local time. If you are a crypto trader, this time period could present the most opportunities for you.
In order to take advantage of volatility, YouHodler provides a variety of tools to help you profit from market movements. Our features, such as Multi HODL and Dual Assets, allow you to capitalize on both bullish and bearish market conditions. By leveraging your crypto holdings up to x50, you can earn interest as high as 365% and multiply your crypto.
Don’t simply hold onto your crypto during volatile periods; take action and potentially profit from them. Visit YouHodler.com today or download our mobile app to see how we can help you activate your crypto.