Is volatility rocking your trading game or does it make you excited? Just what is volatility and how can you put it to your advantage? High volatility is associated with uncertainty and risk. And when it\u2019s high, there\u2019s potential for big price swings. I embrace high volatility for the stocks I trade ... and I can teach you to do the same. Market volatility \u2014 it\u2019s one of those stock market terms that can strike fear in the hearts of some traders. For others, it brings feelings of anticipation and excitement. It\u2019s discussed by the talking heads on financial news channels. It\u2019s cursed by investors who fail to see it coming. And it\u2019s written about in academic papers. If you\u2019ve been following the markets this year, you\u2019ve heard the term volatility a lot. Get used to it ... A recent CNBC article called 2018 the most volatile year on record. (Check out that video \u2014 the Credit Suisse strategist predicts that market volatility will continue.) What do I think? I\u2019m not making any grand predictions, but I\u2019ll say this: I embrace high volatility for the stocks I trade. And I teach my Trading Challenge students to do the same. But it can be unnerving if you\u2019re a newbie. Recently the market has had a fair number of volatility spikes, so here\u2019s a primer to help you keep your cool when things get rocky. What Is Market Volatility? To understand market volatility and how it can work for you as a trader, first you need a basic definition: Volatility is a statistical measure of the gap between low and high prices of a stock. In other words, it\u2019s a measurement that accounts for the stock\u2019s price range \u2014 usually over time and in relation to current price. For overall market volatility, you make a similar calculation using one of the major stock indexes, like the S&P 500. I\u2019ll give you a formula to calculate volatility later in this post. How Are Volatility and Risk Related in an Investment? According to Investopedia, \u201cvolatility refers to the amount of uncertainty or risk related to the size of changes in a security\u2019s value.\u201d In layman\u2019s terms, that means volatility increases when there\u2019s uncertainty \u2014 that brings a risk of bigger price movements. I like that. Financial experts often refer to the VIX, a market volatility index. Created by the Chicago Board of Options Exchange, it uses call and put options to measure future bets on individual stocks and the market as a whole. While that sounds complex, think of it as a way to forecast market volatility. What Does High Volatility Mean? High volatility means the range between upper and lower prices is high ... When buyers outnumber sellers, high volatility sends the stock price higher. When there are more sellers, high volatility sends the price of the stock lower. Both moves are examples of supply and demand combined with high volatility. Benefits of Trading in High-Volatility Markets I love trading high-volatility penny stocks. My trading strategies depend on high volatility. What is volatility trading? It\u2019s planning your setups based around high volatility. While volatility isn\u2019t the only factor, without it the percentage or price movements aren\u2019t big enough to interest me. Big movements in volatile markets mean I don\u2019t have to get in and out at the very bottom or top of the price move for the trade to be successful ... I can wait for confirmation (although sometimes it\u2019s not much of a wait!) before I get in. Because I tend to trade conservatively, I get out when the trade hits the exit point outlined in my trading plan. At the very least \u2014 I close out enough of my position to protect profits and let the rest ride. How to Calculate Volatility of a Stock There\u2019s more than one volatility calculation out there \u2014 meaning it can be a little subjective. The classic measure is called standard deviation. Because I\u2019m interested in volatility as it relates to price swings, I\u2019m going to show you how to calculate volatility a different way first. I\u2019ll use the average true range (ATR) method. ( Pro tip: Add an ATR indicator on most stock charting tools \u2014 so you won\u2019t need to do these calculations yourself. ) \tCalculate the true range (TR) for one period. The TR is the difference between the high and the low.Here\u2019s a simple example: A stock\u2019s daily high was $10, and the low was $6. The true range is $4. (10\ufe636 4).The standard number of periods to calculate the ATR is 14, but for simplicity we\u2019ll use only three. \tLet\u2019s assume the three daily TRs are $4, $3, and $4.25. Now find the ATR: (4 + 3 + 4.25) \u00f7 3 3.75. \tNext, use the ATR to calculate volatility as a percentage of price.Say the stock\u2019s current price is $14. Divide the ATR by the current price and state it as a percentage: 3.75 \u00f7 14 .27 or 27% volatility. (This is super high volatility! You won\u2019t find many blue chip stocks even close to this.) Market Volatility Formula This is one of those times I\u2019m going to tell you to do your homework and point you in the right direction. That\u2019s because I could write five posts just on different types of volatility. Seriously! However, I will give you the standard deviation formula so you can see how it works: Imagine you have three closing prices of $12, $14, and $16. \tFind the average: (12 + 14 + 16) \u00f7 3 14 \tCalculate the deviation by subtracting the average value from each day\u2019s close: 12\ufe6314 -2, 14 \uff0d 14 0, and 16\ufe6314 2. You get \ufe632, 0, and 2. \tSquare the deviations and you get 4, 0, and 4. \tAdd the squared deviations: 4 + 0 + 4 8 \tDivide by the number of data values (three trading days in this example): 8 \u00f7 3 2.66. \tFind the square root of the variance: The square root of 2.66 1.63 ... that\u2019s the standard deviation. Standard deviation is used by many institutional investors to calculate volatility and risk. It gives traders an idea of how far prices might swing from the average. Market Volatility Examples Are you ready for my daily mantra? Keep studying. Study hard. Build your knowledge. For a good example of market volatility right now, look no further than the DJIA. Check out the chart below for the last three months. The two circled candlesticks in October represent two super high market volatility days. The result? Look at the chart: The DJIA dropped 1400 points in those two days. While I trade penny stocks and this chart represents big companies, it\u2019s a good example of market volatility. Volatility in the overall market can affect other markets \u2014 so pay attention! Key Trading Tips for Volatile Markets 1. Try to Identify the Reason for the Market Volatility When you see an increase in market volatility, it\u2019s a good idea to try to understand the reason. The cool thing is that, as with individual stocks, it\u2019s usually something you can identify. For example: News can drive volatility. Think big world news events. Over in the UK, the Financial Times Stock Exchange (FTSE) went through a period of high volatility when the Brexit deal was announced. Other times, the reason might not seem so obvious ... It might be the storm following a long period of calm or steady movement in one direction. If you look at the VIX chart for the second half of 2018, you\u2019ll see a massive spike in volatility in October \u2014 right after a long period of relative calm. The spike perfectly matches that 1400 point drop in the chart above. Some traders call the calm period a listless or stagnant market. Eventually, volatility becomes necessary to get things moving again. 2. Acknowledge That the Market Has Shifted Sometimes we all need a little wake-up call. Markets change \u2014 and when they do you have to change with them. Otherwise you can get pummeled. One of my first big trading lessons happened in the spring of 2000, when the easy money of the dot-com boom came to a screeching halt. The Nasdaq tumbled along with all those cash-eating, no-revenue companies. Suddenly, the patterns I used to go from a small account to well over six figures were not available. Volatility was through the roof at the time, as panic followed panic. It was enough to put a little fear in me, so I sat on the sidelines for a while and watched things unfold. I\u2019ve always been conservative that way. I wasn\u2019t aware at the time how good my instinct was. I was itching to trade \u2014 and it forced me to start looking for new plays. 3. Evaluate Other Potential Opportunities When things seem out of control, take a step back and look at the big picture. Then start looking for other opportunities. It\u2019s the classic \u2018one door closes and another opens\u2019 scenario. The stock market can imitate life in that respect. Back when I was forced to look for new plays, I discovered short-selling. Now it\u2019s one of my favorite strategies. In case you don\u2019t know, short-selling means you borrow shares to sell and then buy shares at a lower price to pay back those you borrowed. In other words, it\u2019s a bet for the stock price going down. When you join the Trading Challenge and put in the effort, you can learn to wisely make money whether the market\u2019s up or down. You\u2019ll even embrace volatility\u2026 4. Refocus on Your Education When things get a little rough \u2014 and I know the market behaves erratically at times \u2014 the best thing to do is take a step back and dig into your education again. Trading is a lifelong skill. It takes time and massive effort to master. Once you\u2019ve been through a few up and down markets and high-volatility periods, you\u2019ll have a better idea how to respond. For now, understand that you should be studying all the time. When in doubt, say during a high volatility period, study more. Consider it your chance to witness firsthand what kinds of price swings can happen. I\u2019d also recommend paper trading during this time. Prepare yourself for next time \u2014 because high-volatility markets seem to come and go. 5. Look at Who Is Making Money I think this is a very underrated and overlooked concept ... What would you do if you wanted to be really good at something? Would you go hang out with someone who was bad at it? Would you listen to the advice of someone who sucked? Unless you want to fail \u2014 no. You wouldn\u2019t. You\u2019d seek out the best. You\u2019d figure out what they did to get where they are. Trading is the same. Find the traders making money \u2014 like my ace students. Figure out where they hang out, like the Trading Challenge chat room, and hang out there. Pay attention to what they\u2019re doing. Ask them questions. Learn the mechanics of how they\u2019re trading. They\u2019re totally up front about both wins and losses. That\u2019s something you should take advantage of. There are a lot of so-called guru traders who are full of crap and don\u2019t share all their trades with you. Model success. It\u2019s the fastest way to get there yourself! 6. Remember: Panic Is Not a Strategy I\u2019ll go one step further with this one and say\u2026 \u2026 Some traders panic. Don\u2019t be like them. As you get better, you\u2019ll start to recognize this more and more. Go one step further: Have a strategy in place for when others do panic. Understanding this can make the difference between the 90% who lose and the 10% who win. What\u2019s the easiest way to avoid panic? Have a plan. Practice the plan: Go over it mentally several times. Paper trade your plan until it\u2019s second nature. Then, when you trade the plan with real money, you\u2019ll know exactly what to do when things go wrong (it happens to every trader at some time). Heck, I only win 74% of the time. I know very profitable traders who only win a little over 50% of the time. The key: They don\u2019t panic. They trade their plan. So make a plan and stick to it. If things go wrong, cut your losses quickly and learn from the trade. 7. Consult With Your Mentor This is huge. Trading can be a very lonely profession. When the market seems to be going mad and you\u2019re trying to figure out what to do, your mentor can be an excellent sounding board. Too many traders lock themselves away researching, watching stocks, watching the markets. The benefit of networking with other traders \u2014 especially your mentor \u2014 can\u2019t be over emphasized. If your mentor has been around a while (I have 20 years in the trenches and 10 years teaching) they\u2019ve probably been through periods of high volatility. Take advantage of this knowledge. To be perfectly clear: I\u2019ve been there and done that in almost every type of market. It\u2019s one of the reasons I decided to start teaching. My goal is to help traders go from newbie to self-sufficient trader in the shortest time possible. You gotta study your ass off to do it. But, oh yeah, it\u2019s worth it. 8. Don\u2019t Give Up I have story after story of students who wanted to quit at one time or another but stuck it out. Now they\u2019re crushing it. It\u2019s all about gaining experience and learning from mistakes. And never giving up. Do you know how many people quit just when they\u2019re so close to putting it all together? Ever known someone to do this? I like to use the example of a baby learning to walk to explain this ... Imagine what the world would be like if parents said to their toddler, after the 50th time they fall, \u201cBetter give up. You\u2019ll never walk.\u201d That would be absolute bullshit, right? So why do so many adults give up? After spending so much time preparing, they give up when they experience failure. What a waste! The best traders learn from their failures. For that matter, the best in almost any field seem to be those who experienced a lot of failure but didn\u2019t give up. Do you know Thomas Edison\u2019s story? It\u2019s said that Edison failed 1,000 times in his attempt to create a light bulb. When a reporter asked him what it was like to fail that many times, his reply was simple: \u201cI did not fail 1,000 times. The light bulb is an invention with 1,000 steps.\u201d Remember that as you work to become a successful, self-sufficient trader. Don\u2019t let the market volatility get to you. Embrace it. The Bottom Line Market volatility can be the penny stock day trader\u2019s friend. Now that you\u2019ve read this primer, it\u2019s time for you to go do some research ... Learn as much as you can about volatility and how it applies to trading. See how it fits with the chart patterns you\u2019re studying. And if you aren\u2019t already paper trading, start now. Use what you\u2019ve learned here to learn more. Write down questions as they come up. See if you can find the answers in other blog posts or on my YouTube channel. Go through the Trader Checklist and Penny Stock 101 information here on the website. I talk a lot about high volatility and how it applies to my strategy. When you\u2019re ready, apply for the Trading Challenge. It\u2019s the course for those who want to master trading and make it a profession \u2014 one that can potentially provide an amazing lifestyle. Are you a trader? How are you dealing with market volatility in your trading? Let me know in the comments. I love to hear from you!