Wall Street rallied on the Federal Reserve’s long awaited announcement that they would be raising rates. A lot of traders did not anticipate a rally like this, but to those that have been studying the markets over the last couple months, this shouldn’t have been a big surprise. Thanks to the prolonged selloffs that have been going on, many stocks found themselves very underpriced, and when the Fed made their announcement, a floor of sorts was put under all of the volatility that’s been going on. Yes, a rate hike hurts businesses over the short term, but it ends all of the speculation that has been going on, and now the real value of companies can begin to shine through.
For short term traders, this can be a very beneficial thing. Volatility is nice because it means that prices are moving more quickly than normal. As long as this is controlled and predictable, that’s fine. But that’s the problem with volatility. Even if it seems to be under control, it very rarely is for long. One little movement, and things can go in a completely unexpected manner. For traders that have fixed risk measures in place, such as those found with binary options, this just means that you count your losses and readjust. For others, this can be a very dangerous thing.
Decreased volatility is a good thing in the end. You may find that your number of trades goes down per day, but your correct trade rate should go up. You will not make as many trades, in other words, but when you make them you can expect to make more money.
In the stock market, companies measure their volatility with an indicator call beta. Beta compares the individual stock’s volatility to the market as a whole. For example, a big stable company like Apple will have a beta of 0.99, or so. If the value of beta is under 1.00, this means that the company has an above average stability, and is less volatile than the market when all companies are grouped together. But, if you look at a small company, like Yahoo!, the beta could be up over 2.00, meaning that the stock is twice as volatile as the general market.
When markets are more predictable, the standard rules are more easily applicable, there are fewer surprises, and when a surprise does occur, it is easier to predict how others will act, and therefore profit off of their actions. Short term traders tend to favor volatility because of fast moving prices, but this requires a ton of capital. 60 second binary options traders can use this method, too, but this is tough. The average short term trader will be more successful when things are easier to predict. This is something that binary options traders forget; you don’t need a ton of movement to see a big profit, you just need to be right by a fraction of a penny on the direction of price change.
With the Fed’s move finally clear, traders no longer need to keep guessing as to what is going to happen and when. The next step is when the next hike will occur. Right now, the general consensus is that it will happen in April. This is based off of the futures market and looking at how traders were treating contracts that expired before, during, and after the month of April. That gives us a lot of time–at least three months–to have stability in stock and index prices on this front. For those that are able to look at fundamental data, find trends, and then use the correct technical indicators to put together short term trades, this is a very promising time.