You must understand market volatility if you want to trade in the markets...\u00a0 It can have a huge impact on your potential profits and losses. Three out of four stocks follow the overall markets. If there\u2019s market volatility that means more volatile stock moves. That\u2019s something I love to take advantage of in my trading. And it\u2019s why I love penny stocks \u2014 they\u2019re some of the most volatile stocks in the market. But increased volatility can also mean increased risk... So you must understand what causes market volatility and how it can impact your trading. In this post, I\u2019ll give you a simple volatility definition and volatility formula. Plus, find out my top tips for trading market volatility \u2026 Let\u2019s go! What\u2019s Market Volatility? To understand market volatility and how it can work for you as a trader, you need a basic volatility definition\u2026 Volatility is a statistical measure of the gap between the low and high prices of a stock.\u00a0 In other words, it\u2019s a measurement that accounts for the stock\u2019s price range \u2014 usually over time and in relation to the current price. To gauge market volatility as a whole, you make a similar calculation using one of the major stock indexes, like the S&P 500 or Nasdaq. I\u2019ll give you the formula to calculate market volatility later in this post. But first... Is Market Volatility Good or Bad? That depends on who you ask. I love it. It allows me to take advantage of huge price swings in a short amount of time. I don\u2019t like to hold sketchy penny stocks too long. I want to be in and out of positions quickly. My goal is to take the meat of the move and move on to the next trade. In uncertain markets, I don't even like holding stocks overnight since volatility can also increase risk. More on that later\u2026 New to penny stocks? Learn about this niche that helped me make over $1.1 in trading profits in 2020.* Get my FREE penny stock guide here. (*Please note: My results are far from typical. Individual results will vary. Most traders lose money. I have the benefit of years of hard work, dedication, and experience. Trading is inherently risky. Do your due diligence and never risk more than you can afford to lose.) What Causes Market Volatility? Market volatility is created by mass buying or selling. Increased volume in the market can also increase volatility. The higher volume of trades in one direction creates bigger moves. Market volatility is usually triggered by economic factors like interest rates, or an unpredictable \u2018act of god\u2019 that impacts oil or commodity prices. Economic uncertainty can cause fear in investors and traders. That increases volatility. And it\u2019s why increased market volatility is usually associated with bear markets. While bull markets tend to be less volatile. Implied Volatility vs. Historical Volatility Implied volatility is more relevant to option traders. They use it to make an educated guess on how volatile a stock will be in the future. But it doesn\u2019t indicate whether the price will move up or down. While implied volatility attempts to measure volatility in the future, historical volatility is based on the past moves of the stock. It can be measured by the percentage change in a stock\u2019s price over a certain time frame. That\u2019s why I always watch former runners. Stocks that have spiked before can spike again \u2014 because they\u2019re volatile. Since I\u2019m a day trader, I want to trade stocks with a big daily range. I don\u2019t care how much a stock moves over months, years, or decades. How Are Volatility and Risk Related in Trading? Volatility increases when there\u2019s uncertainty in the market. With increased volatility comes bigger price movements, which also increases the risk... High volatility means big price swings in both directions. Which increases the risk of stocks or the market tanking. That's why rule #1 is to cut losses quickly. If a stock goes against you, get out. Don\u2019t bag hold a losing position and hope the stock will go back up. Accept your losses when you\u2019re wrong and move on. Also, take profits when you have them and sell into strength. Don't get greedy. What Does High Volatility Mean? High volatility means there\u2019s a wide range between the upper and lower prices... \tWhen would-be buyers outnumber potential sellers, high volatility sends the stock price higher. \tWhen more people want to sell, 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\u2019s volatility trading? It\u2019s planning your setups around high volatility. While volatility isn\u2019t the only factor to consider before a trade, if a stock\u2019s not volatile, I\u2019m not interested. 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... Like I said before, I aim to take the meat of the move and move on to the next opportunity. And I tend to trade conservatively. So I exit when a trade hits my goals, as I outline in my trading plan. I almost always sell too soon but taking small profits allows my account to grow over time.* Want trade alerts and commentary every time I enter and exit a trade? Subscribe to Profit.ly and I\u2019ll send alerts right to your inbox. It\u2019s one way you can learn more about the process behind my trades. Want to know more about how I handle volatile markets? Get my NO-COST \u201cVolatility Survival Guide\u201d here.\u00a0 How to Calculate a Stock\u2019s Volatility \u00a9 Millionaire Media, LLC There\u2019s more than one volatility calculation out there \u2014 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\u2019ll show you how to calculate volatility in a different way first. I\u2019ll use the average true range (ATR) method. (Pro tip: You can add an ATR indicator on most stock charting platforms \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 an 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 three. \tLet\u2019s assume the three daily TRs are $4, $3, and $4.25. Now find the ATR: (4 + 3 + 4.25) \/ 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 \/ 14 0.27, 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\u2019ll tell you to do your homework. I could write five posts just on different types of volatility formulas. Seriously! However, I\u2019ll 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) \/ 3 14 \tCalculate the deviation by subtracting the average value from each day\u2019s close: 12\ufe6314 \u20132, 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 \/ 3 2.66. \tFind the square root of the variance: The square root of 2.66 1.63 ... that\u2019s the standard deviation. Many institutional investors use standard deviation to calculate volatility and risk. It gives traders an idea of how far prices might swing from the average. Market Volatility Example For a good example of recent market volatility, look no further than the Invesco QQQ Trust (NASDAQ: QQQ). It\u2019s an ETF that closely follows the Nasdaq. Check out the two-year chart below\u2026 QQQ chart: 2-year, daily candle \u2014 courtesy of StocksToTrade.com Notice the low volume and small candlesticks leading up to March 2020. As soon as there was uncertainty, a downtrend started. Volume and volatility increased, shown by large volume bars and candlesticks. Following the large crash, volume and market volatility remained higher than it was previously.\u00a0 Also, notice how volume spikes when the market dips. Key Trading Tips for Volatile Markets \u00a9 Millionaire Media, LLC 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. With individual stocks, it\u2019s usually something you can identify, like news. But when it comes to overall market volatility, think big world news events. Like the lockdowns that massively affected the markets in 2020. But other times, the reason might not seem so obvious\u2026 Algorithmic trading, stop losses, and forced buying or selling due to broker margin calls can all increase market volatility. Some traders call the calm period a listless or stagnant market. Eventually, volatility becomes necessary to get things moving again. 2. Acknowledge When 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 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. It will happen again when the recent market volatility slows down. If and when the bubble bursts, many traders will likely go down with the ship because they lack education. It seems easy to make money in a booming volatile market. But when it shifts or slows down, you must adapt... That\u2019s when you need trading education. You need to know how to trade small, focus on the best setups, and protect your account. 3. Evaluate Other Potential Opportunities This goes hand in hand with adapting to market changes. When things seem out of control, step back and look at the big picture. Then start looking for other opportunities. Take time to watch the market for patterns that are working. Don\u2019t be biased one way or the other. Back when I was forced to look for new plays, I discovered short selling. It worked well for me back then. But now it's an overcrowded strategy. It creates an increased risk of short squeezes. Will\u00a0short selling be a good strategy in the future? Who knows. Watch, adapt, and react. Don't try to predict. 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 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 of how to respond. For now, understand that you should be studying all the time. When markets shift \u2014 study more. Consider it your chance to witness firsthand what kinds of patterns work in different markets. You can also paper trade to test new strategies before risking your hard-earned money. Prepare yourself for next time \u2014 because high-volatility markets seem to come and go. Start your trading education by joining my 30-Day Bootcamp. It\u2019s a month's worth of lessons with daily assignments and homework. And you can work at your own pace and repeat it as many times as you like. Bonus: It comes with \u201cThe Complete Penny Stock Course\u201d book and my \u201cPennystocking Framework\u201d DVD. 5. Learn From Those Who Find Success What would you do if you wanted to be good at something? Would you hang out with or listen to someone bad at it? I hope not. If you\u2019re smart, 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 Challenge students turned mentors and moderators. Figure out where they hang out, like the Trading Challenge chat room. Then hang out there so you can learn from them. Pay attention to what they\u2019re doing. Ask thoughtful questions. The top Challenge traders are upfront about both wins and losses. That\u2019s something you should take advantage of. Model success and learn from failures. That\u2019s how you shorten your learning curve. 6. Remember: Panic Is Not a Strategy Some traders panic. Don\u2019t be like them. As you improve, you\u2019ll recognize this more and more. Go one step further: Have a strategy in place for when others panic. What\u2019s the easiest way to avoid panic? Have a plan. Practice the plan: Go over it several times. Paper trade your plan until it\u2019s second nature. Then, when you trade the plan with real money, you\u2019ll know what to do when things go wrong. (It happens to every trader at some time.) I know profitable traders who only win a little over half the time.* They trade their plans, don\u2019t panic, and cut losses. So make a plan and stick to it. If things go wrong, cut your losses quickly and learn from the trade. 7. Consult Your Mentor Trading can be a lonely profession. When the market\u2019s nuts 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. There\u2019s a great benefit of networking with other traders \u2014 especially a mentor. If your mentor has been around a while (I have 20+ years in the trenches and 10+ years of teaching) they\u2019ve probably been through periods of high market volatility. Take advantage of this knowledge. I\u2019ve been there, done that in almost every type of market. When I started out, I didn't have a mentor. I had to learn the hard way. It\u2019s one of the reasons I started teaching. I give live Q&A webinars for Trading Challenge students every week. And if there are any good trades, I\u2019ll trade live so students can learn what trading looks like in real time. Many top students also give webinars. And some of them are now millionaire traders and moderators in my Challenge chat room.* They answer questions daily and share their thoughts on the market. Want access? Apply for my Trading Challenge today. (*Trading results are not typical. Individual results will vary. Most traders lose money. My top students and I have the benefit of many years of hard work and dedication. Trading is inherently risky. Always do your due diligence and never risk more than you can afford to lose.) 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, learning from mistakes, and never giving up. Do you know how many people quit when they\u2019re so close to putting it all together? The best traders learn from their failures. They don\u2019t give up. Don\u2019t let the market volatility get to you. Embrace it. Recap: Market Volatility in 2020 The 2020 market volatility was insane ... Many Americans got stimulus checks, and the markets jumped after that.\u00a0 We saw a ton of volume in the market as new traders looked to the markets as a way to make \u2018quick\u2019 money. That increased volume and volatility created tons of opportunities. Multiple hot sectors all ran at once \u2014 EVs, stay-at-home stocks, food delivery, crypto stocks, and biotechs. There seemed to be 1,000% gainers almost every day. But that kind of action can\u2019t last forever... Market Volatility in 2021: What to Expect? \u00a9 Millionaire Media, LLC 2021 started hot. Bitcoin reached all-time highs, sparking crypto-related stock runs. Then NFT stocks became the big thing. And a third wave of last stimulus checks went out in March. What does that all mean for the future of the markets? I don\u2019t try to guess. Instead, I\u2019m prepared to react. I've been warning traders the market bubble could burst at any time. So be ready to adapt. Will the volume dry up overnight, probably not... But we could see more traders exit the market and give up. It\u2019s hard to make money when stocks don\u2019t just go up. That\u2019s why having a trading education is so important. Frequently Asked Questions About Market Volatility The Bottom Line Market volatility can be a penny stock day trader\u2019s best friend. Learn how to take advantage of it. Watch the market in real time and paper trade to get a feel for how volatile penny stocks move. Study the past.\u00a0 You can learn a lot from past volatile markets and bubbles. Find out how you can apply what you learn to your current trading strategies and chart patterns. Study all my blog posts on how I take advantage of volatility. And watch all my YouTube videos. I talk a lot about high volatility and how it applies to my strategy. When you\u2019re ready to take your trading to the next level, apply for the Trading Challenge. It\u2019s only for the most dedicated students. Are you ready to learn how to navigate any kind of market? Apply today. How do you handle market volatility in your trading? Let me know in the comments. I love to hear from you!