If you want to invest in the stock market, you need to learn how to trade stocks and consider the risk. Volatility signifies the inherent risks involved.
Informed investors can use volatility to make money irrespective of the direction of price movement via day trading. And sophisticated investors understand how volatility affects a portfolio. At times, informed and sophisticated investors are the drivers of volatility in the stock market.
Find Most Volatile Stocks
Day traders often focus on stocks that are seeing significant price movements with a low float. Volatile swings in the prices of stock offer more trading opportunities and a chance to make money fast.
You can use a powerful stock screener to find stocks that meet specific criteria. For instance, you can find stocks that often experience price volatility on high trading volume with a low flat gapping up a certain amount. Or you can choose to screen stocks that are likely to be volatile on a particular day or trading hour based on past price and charting patterns.
You can also create a combination of criteria to create customized screeners.
Scan for The Most Volatile Stocks
To find stocks with high volatility on high trading volume, go to Trade Ideas or chose an alternative stock screener if you already use it. It is crucial to have the ability to filter specific criteria like:
- Stock price between $5 and $100
- Average trading volume greater than 500,000
- Today relative volume greater than 200%
- Today minimum range greater than $0.50
- Set the volatility filter to greater than $0.25
Add the filters as columns, sort them by relative volume, or choose a pre-configured Trade Ideas screener to scan for the most volatile stocks automatically.
Scanners Provide a Watchlist With Relevant Candidates
You can use scanners to develop trade ideas for a given day. Swing traders scan once a week for a given week. Pick a couple of stocks from the list and trade them based on your favorite trading strategy.
Trade on paper and make notes about your successes and failures.
Optimize further before trading with real money. As discussed, you can customize many aspects by choosing the filters to search to create a strategy best suited to your needs.
Analyzing Stocks And Find The Cause For a Move
Another approach is to check for the drivers of stock movements. For instance, one can follow earnings reports to check which firm has beat earnings guidelines. Those stock prices are likely to fluctuate a lot with high volatility and sharp moves.
Create a list of stocks with near earnings, for example, earnings before market open and earnings after market close. If you focus on large-cap stocks, you will notice that the most volatile stock is an earnings play in most cases.
With data provided by most free tools and analysis websites, some user experience and price action analysis, you will be able to identify the most volatile stocks quickly before the market open. Traders can also use a pre-market scan to identify stock volatility.
Further Filter the Volatile Stocks
Filter the list by change vs. previous day close and look at the pre-market charts. If the pre-market price is mainly horizontal, then stock trading of this ticker symbol is probably not worth it since it lacks volatility.
If you identify stocks with a price range of 10% on heavy volume with nice and clean chart patterns in the pre-market, then you can add this stock to your watchlist.
Look for stocks that were winners or losers in the prior trading session. They are most likely going to continue their winning or losing streak in the previous day’s direction. Add in a volume filter to ensure the stocks are suitable for your trading strategy to ensure excellent order executions. As long the stock is making new highs and new lows on strong volume with a wider than average price range, it remains in play.
It is wise to generally look for stocks that have at least 1 million shares traded daily. This ensures that there is no demand and supply problem in the market, and one can buy and sell a given stock as required. The order executions are more likely to have no or at least only low slippage involved. The tighter the spread between the best bid and best ask, the better the trade executions.
Have a look at the price change in small time frames. If the stock jumps wildly around, then tight stops normally do not work. But if the price action is linear with some stock volatility, it can be a good candidate for breakouts and breakdowns.
Use free Finviz
You can use Finviz to set up a daily stock scan if you mainly trade with longer holding periods. Finviz is easy to understand, and the free version offers a lot of excellent features. To find stocks with an average trading volume of more than 1 million shares, click the “Screener” tab and set “Average Volume” to “Over 2M”. Below the filter is a column called “Performance.” Click on that tab to see remarkable periodical performance comparisons.
If you want to exclude exchange traded funds, you can specify this in the “Industry” filter and set the filter to “Stocks only (ex-Funds)”). Subscribers to Finviz Elite can export the full report to MS Excel. In Excel, you can filter further or write formulas to develop an automated result list every time you generate an export. If you do not want to use Finviz Elite, proceed with the free version and use more filters like “average volume,” “stock price,” or “Float.”
Earnings Calendars Tell You When Volatility Increases
Use appropriate stock screeners like Trade Ideas or Finviz Scan each morning to see if any well-known stocks have earnings releases due out. Earnings announcements about a company’s quarterly profits or losses often cause big price moves. Besides Trade Ideas and Finviz, Yahoo! Finance is a reliable source for the earnings calendar.
Market volatility increases when earnings get announced. Gap ups and gap downs are often price changes of more than 10% relative to the previous day close often frequently. This is when a day trader can capitalize on the most volatile stocks caused by earnings announcements.
The gap and go strategy is a well-known strategy for trading gaps. The announcements happen before the market opens or after the market close. Therefore it is outside the regular trading hours. Be prepared by using a stock screener or earnings calendar.
Monitoring Intraday Volatility
If your current job does not allow you to trade the market open, scan for volatile stocks in the middle of a day. Consider that you need to use a higher time frame to trade from. You can use filters such as volatility and top gainers/top losers on stock screeners like Finviz or Trade Ideas.
Most brokerage platforms provide scanner capabilities in real-time. TradeStation is one of the most powerful brokerage scanners. You can use Radar Screen for up to the second updates or the scanner functionality for scans once per minute.
Day trading requires appropriate attention. Otherwise, one might miss valuable trading opportunities. Patiently watch for market movements throughout the day. If a stock opens 20 percent down and stays there, it doesn’t provide an opportunity for trade.
But if a stock opens down 20% and then moves 10% in one direction or the other, that might be a good trading opportunity.
Earnings often cause high percentage price movements of most volatile stocks, while merges and acquisitions headlines typically cause huge gaps but no further volatility. You can use a news service like Benzinga Pro and Hammerstone Markets to research the price change catalyst.
Traditionally, stocks in some industries are more volatile compared to others. While prices in some sectors bounce around a lot, stock prices in other sectors docile. Stocks prices in the conservative sectors move with small changes at a steady pace over long periods.
Let’s have a look at stock market sectors that have shown the most volatility historically over a sustained period.
Volatile Sectors List:
- FAANG Stocks
- Health Care and Biotech
What Causes Sector Volatility?
There are many factors driving volatility. The primary factors are sector characteristics. An industry that is more affected by global and macroeconomic news is likely more volatile. For instance, a global health problem has an impact on all industries. It affects the tourism and hospitality industry relatively more, while biotech and new technologies like work at home specialists benefit from the situation.
Also, trader emotions, such as fear and panic, play a considerable role. Trend-following traders who succumb to their emotions may cause massive sell-offs or buying sprees. If the volume is big, this might cause significant price movement, resulting in a self-fulfilling prophecy. An uncertain market with nervous investors can cause significant price moves.
Global events such as elections and political unrest have a significant impact on stock prices. Bad news such as bankruptcies or major scams in the same industry may also cause big price fluctuations. An issue for one company in a sector can cause movements for the other stocks in the sector.
Some private equity firms and hedge funds might be forced to sell assets due to financial troubles. These institutional sales often cause big swings in stock prices. The demise of Long-Term Capital Management is one such example.
According to S&P Global research, during the 2010s, the most volatile market sectors were most sensitive to oil prices. In 2020 oil plays a less important role since other headlines like the stimulus discussion are all over the place considered as more important.
The GameStop frenzy in 2021 is an excellent example of when traders, markets, hedge funds, and even long term investors cause shares to move parabolic to the upside and downside. You can make money trading stocks like this, but you always have to consider the risk. People often forget to plan the entry point and exit point in advance and may invest a too high percentage of the overall capital.
It is important to keep your emotions under control, which results in better returns, gives you an advantage versus the competition, and ensures using an appropriate strategy that works.
Penny Stocks and Their Role in Volatility
Penny stocks are looking incredibly cheap and often belong to the most volatile stocks. But there are differences in penny stocks that you should be aware of before trading them. It depends a bit on the region you live in, but usually, all stocks below $5 are considered penny stocks.
There are two major downsides to trading penny stocks when they pop up on your most volatile stocks list.
- Shortability: You nearly never find any penny stocks on an easy to borrow stock list of your online broker. And it is also seldom that penny stocks make it to a hard to borrow list. Plus, if they are hard to borrow, you have to pay high hard-to-borrow fees to your broker. All in all, the potential of using such volatile stocks in the <$5 price range is limited to buying shares. But volatility opens the potential to make profits in the short term by classical buying and also short selling stocks. If you chose penny stocks to day trade, you might limit the potential.
- Trading Volume: Stocks below $1 fall out of a Nasdaq listing if they are not making it back above the $1 mark fast. A delisting often causes further falling prices per share. And often, the spiral ends up in bankruptcy. Also, stocks below $1 are often thinly traded, and it may become hard to close your position. You can use whatever technical indicators or penny stock trading magic formula. If there is no other side that wants to trade with you, you sit on your shares or have to sell them for an unfavorable price.
Even if your trading platforms allow you to trade penny stocks and have pink sheets market data and all the penny stock indicators you ever wanted to have, put an additional layer of caution at this kind of investing. Such trades can end up with bad results for investors, and therefore investors should only execute trades if the chances are that the trade can be closed with low risk.
Trading stocks with a share price of >$5 can be an advantage if liquidity is high, all information about the company is transparent and if the stock chart suggests that by considering the market data, trade has a high probability of success.
Things to Consider
- Most volatile stocks offer excellent short-term investment opportunities for experienced day traders. High trading volume and low bid-ask spreads have to be considered before getting into a trade.
- The long-term investor prefers a stable and predictable market with low volatility and sustaining growth, while day traders aim to get into a trade when volatility is high.
- The Securities and Exchange Commission SEC protects private investors via the pattern day trader rule requiring a maintained minimum of $25,000 in the account to actively day trade. Swing trading is possible in margin accounts and cash accounts.
- Long term investors focus on growth stocks instead of the most volatile stocks. Technical indicators can be used to filter down further, while excellent tools like Trade Ideas offer over 500 different filters and trading alerts.
- Investing in the stock market provides good returns most of the time. Traders may feel in a rush to execute trades if a share price is <$1 or if the stock gaps up 100%. But even if it is tempting to start investing in such stocks, traders need to check if it is worth taking the risk compared to the profit potential. Trading volatile stocks is a two-sided sword, the potential is exceptionally high, but it also means that the risk is high.
- Those who focus on options trading should also consider that volatility increases the premium that has to be paid for the option traded.
Most Volatile Stocks: Wrap Up
Volatile stocks can boost your performance. Making 50% and more overnight is possible. But holding penny stocks can also lead to losses of 50%. Therefore day trading volatile stocks with high trading volume, good price action, low spreads, and suitable catalysts are the way to go.
The timeframe for day traders is often the 1-minute chart, and some use even a tick chart. A good broker and trading platform are crucial to trade efficiently. The lower the time frame, the more important are excellent order executions and immediate support when calling the broker.
Like always, if you try something new or if you do your first steps in trading, make sure to trade on paper with a simulated account, especially if you get into trading volatile stocks for the first time.