Stock Trading Volatility

Trading volatile shares: Using volatility for short-term strategies

Volatile stocks are a challenge for traders – but stocks with pronounced price fluctuations also offer corresponding profit prospects. The strategies and analyses differ significantly from the approach taken with a long-term investment horizon, with the potential for good returns being offset by the corresponding risk of loss. Anyone involved in this area of stock trading will come across a number of stocks that are very rewarding despite or precisely because of their pronounced volatility – including the front-runner of the “fear barometer”, the Varta stock.

  • Volatile stocks are a challenge for traders
  • Values with strong price fluctuations are suitable for short-term trading
  • Good profit prospects are offset by the risk of loss
  • Among the particularly volatile values is the share of Varta AG

What is stock trading about?

Before the answer to the question of why trading in volatile shares is so rewarding, there is the question of share trading as a whole – why do investors or traders buy company shares, and how do they proceed?

In principle, shares are shares in the issuing company. By issuing the securities, corporations have the opportunity to raise outside capital, for example to invest in development and production. For the shareholders, in turn, the security is a participation in the value development of the company, through the increase in value of the share itself, but also thanks to the profit distributions that some groups make after the annual general meeting, the so-called dividends.

Private investors usually pursue a different strategy with their purchases than short-term traders. They buy after careful consideration, and they do so in order to hold the shares for the long term. The portfolio is only occasionally restructured, the intention is to build up assets over years or even decades. Volatile stocks understandably have no place in such a portfolio.

This makes them all the more attractive for short-term traders. With the help of a dynamic trading strategy, they take advantage of the fluctuations in order to enter the market at the right time and sell the shares at a profit only a short time later.

Buy shares – this is how it works

Shares are issued by companies that have passed the high requirements of an IPO. The procedure consumes time and money; once completed, the securities are traded. In many cases, the trading process is purely electronic. There are still floor exchanges, but activities are increasingly shifting to electronic trading places such as Xetra or direct trading via trading systems such as Tradegate. This is particularly important for trading volatile stocks – without real-time access to trading, stock traders would have no chance of success.

Price formation through supply and demand

Once shares are traded after the IPO, the prices develop according to supply and demand. The originally determined first sale price will subsequently develop in accordance with the laws of the free market. The supply of shares is opposed to the desire to buy – if the demand is significantly more pronounced than the supply, the shares become more expensive, and if the demand decreases, the prices will also fall. In the case of particularly volatile shares, there is a high level of interest, coupled with market news or events that drive investor behavior and thus also the price trend.

WHAT IS VOLATILITY?

Stocks that are more or less peacefully drifting along are not really attractive for stock exchanges, investors and traders. A certain volatility makes securities trading lucrative in the first place. But what are volatile stocks? The term refers to stocks whose prices show pronounced fluctuations. In a test, prices move sharply upwards within hours or days, only to fall again and then rise again a little later. In the chart, such shares show a clearly visible zigzag pattern in the price.

The more pronounced the volatility is, the less it is possible to estimate the future price development. This increases the risk for traders or shareholders to make losses by buying. A volatile price development can be measured over any period of time and depending on the trader’s trading strategy – either over the past years or intraday.

Those who do not want to go to the trouble of determining the volatility of a share in question themselves can access financial portals and stock market news. There is a separate volatility index for DAX stocks. What stock market experts call the “fear barometer” is formally called VDAX. The volatility DAX measures the extent of price fluctuations assumed for the following 30 days, based on DAX options. For traders, the volatility of the VDAX can be directly translated in percentage points into the probability of market behavior: A high level of the VDAX suggests strong fluctuations in the German leading index in the coming days.

Volatile shares: Example Varta

The undisputed leader on the German fear scale is Varta’s share. Astonishing at first glance, because the group, which has been in existence since 1887 and whose name derives from “Sales, Charging, Repair of Transportable Batteries”, is a traditional German company and a well-known brand. Today’s Varta AG consists of the three companies Varta Microbattery, VARTA Consumer Batteries GmbH & Co. KGaA and Varta Storage GmbH, the majority of shares are held by the Swiss group Montana Tech Components.

The battery manufacturer was founded under the name AFA and was the first company to produce accumulators on a large scale at the end of the 19th century. AFA also survived the First World War, but was then taken over by Günther Quandt in 1922 by means of systematic share purchases. Quandt became chairman of the supervisory board, and under the leadership of the professed National Socialist and later military economy leader, AFA developed into a company important to the war effort in the Third Reich and operated production facilities even in concentration camps. After the end of the Second World War and the loss of production facilities in East Germany, the 1962 Annual General Meeting decided to rename AFA Varta. In 2000, the company began to sell its operating divisions and retained only the management of existing assets. Varta AG, which is now only active in administration, was purchased in 2011 by Montana Tech Components, which had previously acquired Varta Microbattery and Varta Storage. In this constellation, Varta AG went public again in October 2017.

The group is listed in the German Entrepreneurial Index, in the DAX International Mid100 and most recently in the MDAX. Varta AG is a leader with its innovations in the business areas of micro-batteries, for example for hearing aids, but also in storage solutions for private households and industrial use.

PRICE DEVELOPMENT OF THE VARTA SHARE

Due to the changes in the group and shareholder structure during the last years, the price development of the Varta share has also changed significantly. Where the chart used to be rather uneventful, the share price has reached a real high in 2019. Triggered by the economic effects of the Corona Pandemic, however, the share price has now fallen significantly again (as of March 24, 2020). For traders and investors, this represents a good opportunity to take advantage of the situation right now.

Analysts attest Varta great potential. The Group is making good sales of rechargeable micro-batteries, as used in hearing aids, but also in headphones – certainly a growth market in view of an aging population. Energy storage solutions are also doing well, with Varta among the market leaders in this area, which should be to the company’s advantage in view of the energy turnaround. Strong competition, especially from China, will ensure that volatility will continue in the future.

Trading volatile shares – that’s what counts

The Varta share has a volatility of 61.46% over 250 days, but significant price fluctuations are also evident during the course of the day. In order to trade such volatile shares, good preparation is essential.

Fundamental analysis, as used by long-term investors, is not very helpful for short-term trading. In this case, traders use technical analysis to identify a suitable time to enter the market based on the patterns in the chart. But also the later – and preferably profitable – exit should be planned from the beginning. By using stops, traders can protect themselves against losses. With particularly volatile stocks, the setting of the stop is critical – it should not be too close, but rather a little further away from the entry than usual.

Placing such stops as close as possible, but still far enough to protect the position, helps traders to close less promising positions as quickly as possible. This is the most promising approach for volatile stocks. The stock itself is not traded. Who wants to profit from the strong stock exchange daily price fluctuations, trades rather derivatives such as share CFDs.

The right tools for the valuation of volatile stocks

The determination of the optimal entry and exit is especially important for traders with very volatile stocks. Because in short-term trading, profit and loss depend on it. But also in long-term investments it is important to be able to buy a value as cheaply as possible. Accurate forecasts are a challenge even for financial experts, because global markets are highly interdependent and are controlled by numerous micro and macroeconomic influences.

With the help of some analysis tools, however, investors and traders can find the most favorable entry point for their planned transactions. In addition to background information on companies and industries, gross domestic product, interest rate developments at central banks, the oil price and national inflation rates are also helpful.

Key figures can also be included in the own analysis, especially the price-earnings and price-book value ratio of a share. Both values are easy to calculate and make a significant contribution to determining whether a share is over- or undervalued and therefore represents a worthwhile purchase.

Chart analysis, on the other hand, assumes that investor sentiment is reflected in historical prices and can be identified there in the form of patterns. Such patterns can be applied to future trends, so that entry and exit points can be determined graphically.

Access to the markets

Where to open a securities accountA private individual who wants to invest in shares or trade derivatives on shares cannot do so without an intermediary. Access to over-the-counter and stock exchange trading is provided by banks or brokers, depending on the desired strategy and products. Investors can best identify a suitable provider by comparing banks and brokers.

Anyone planning a long-term investment in shares can make the purchase through a branch or direct bank, directly from their home banking. To do this, you need a securities account, a special type of account for trading in shares, bonds or funds. The custody account itself can usually be opened free of charge, and in terms of trading fees, branch banks with their personal customer service are usually a little more expensive than direct banks.

Trading in derivatives can also be done through a bank, but in most cases a specialized and licensed provider is more advantageous. Regulated CFD brokers offer their customers not only technically well-rounded trading software, but also numerous additional services, including training materials.

Compare trading costs before you enter the market

The costs incurred in trading are important in that they can significantly reduce the later returns. Therefore an offerer comparison before the mechanism of a depot or a trading account is to be recommended absolutely. The depot is usually free of charge and in the hand turning furnished. The associated clearing account is sometimes created at the same time, and existing current accounts can also be used.

However, there are fees for the actual trading, i.e. commissions for the bank or broker, as well as the stock exchange fees for share trading. In addition there are sometimes hidden costs – deposit and withdrawal fees, fees for inactivity, if one does not trade for a longer time, conversion costs, if foreign currency is used for a share purchase. These cost factors should be examined in detail. Only in this way can investors be sure not to be confronted with unpleasant surprises later on.

Set up a securities account or trading account

Finally, the decision is made to open a securities account with a bank or a trading account with a CFD broker. This can usually be done completely online. The required information is almost always the same – necessary are personal details, residence, contact details. But most financial service providers are also interested in the existing experience with securities trading and the financial situation.

Here above all beginners should answer as truthfully as possible and not overestimate themselves, because the risk classification is usually made on the basis these criteria, always for the protection of the customer. If all information is complete, a new customer must still verify himself. For this purpose, a valid identification document must be uploaded, as well as proof of residence, for example in the form of a current electricity bill.

After verification, the customer receives his access, often by mail. Now the clearing account or trading account must be capitalized, then securities trading can begin.

Trading volatile shares with CFDs

Trading in derivatives is particularly useful for volatile shares. This is where several advantages for short-term trading come together. Traders do not have to purchase the underlying asset, such as the Varta share, but have a share in the price development. CFDs or contracts for difference are particularly suitable for trading. Contracts for Difference were developed in Great Britain in order to be able to trade with shares and to avoid the stamp duty on share transactions. Meanwhile there are CFDs on underlying assets from all asset classes, access to trading is provided by CFD brokers.

The flexible financial products are straightforward in design and versatile; they offer good return opportunities, but CFD trading also involves risks. The profit arises from the price difference – hence the name – between purchase and sale. With a CFD, traders not only have the opportunity to speculate on rising prices. One can also go “short”, i.e. try to anticipate falling price developments. This is what makes CFDs so ideal for volatile underlying assets. Trading takes place over an off-exchange network, and in short time spans, usually within the framework of day trading.

Since all positions are opened and closed on the same trading day, a day trader does not have to pay overnight fees or fear price gaps the following morning. Margin trading is one of the advantages of contracts for difference. CFDs are leveraged products, in the case of stock CFDs the volume traded can be multiplied by a factor of 5:1. In practice, this means that private traders only have to deposit one fifth of the actual trading volume as margin. The broker borrows the rest. In the best case, therefore, the leverage increases the return achieved by the corresponding factor.

Hedging volatile shares with CFDs

Contracts for Difference, however, have applications beyond day trading – because investors can also take advantage of CFDs. Since one can speculate on falling prices, they are extremely well suited for hedging, i.e. securing the stock portfolio.

Because if the share price falls, the CFD makes profits on this very underlying asset, which at least partly contribute to compensate the loss in value of the share. Therefore, experienced investors like to use such hedging strategies with which losses can still be limited or even profits achieved in almost all situations. Again, volatility is basically an elixir of life on the stock market. Only with sideways markets does nobody make profits.

The experienced use of CFDs therefore holds good chances of returns. However, one should not underestimate the at first sight so easily understandable contracts for difference. The lever also works when losses occur. Although brokers in the EU are now required to close out a trader’s positions when the trading account threatens to slide into the red, and thus avert high levels of over-indebtedness. The invested capital is lost in this case, however. Brokers therefore expressly inform their new customers that CFDs are considered risk instruments and at the same time offer them training materials for a well-prepared entry into trading.

Training materials and demo accounts

When choosing a CFD broker, quality criteria such as regulation, deposit protection and trading conditions come into play. Furthermore, it is especially helpful for beginners if the broker supports them in their preparation. Because securities and derivative trade are highly speculative. Unlike with a fixed-term deposit account, the possibility of a total loss cannot be ruled out. Respectable brokers may secure the deposits of their customers, but the risks of wrong decisions when buying shares or CFD trading are borne by the investor himself. In order to minimize these risks, a thorough examination of the subject helps.

Many brokers and some banks therefore offer their customers a more or less well-assorted education sector. Here numerous media can be used for the entrance. E-books, informative blogs and market news, video tutorials on trading software, online courses on specific topics and real-time webinars are just some of the resources offered. Often the content is staggered for beginners, advanced users and professionals – making it easier for newcomers to learn the basics first and then later to address topics such as strategies and risk management.

PRACTICAL EXERCISE WITHOUT FINANCIAL RISKS

A practical framework for action is provided by free practice accounts, often with no time limit. These demo accounts or sample accounts give access to the trading platform, sometimes even different forms of software, with all functions, including charts, drawing tools and indicators. The prices are real or slightly offset, so that all trading takes place under realistic conditions. Only money is not necessary – because demo accounts are equipped with virtual capital. Therefore, beginners can take their first steps here without risk and develop their first own strategies. Even more experienced traders appreciate the demo as a test environment to try out and optimize new approaches. Thanks to a demo account, you can start trading with real money when the trader feels ready. But even then, the first trades should be executed with limited amounts of money, with capital that you can get over if necessary – especially when it comes to particularly volatile underlyings.

Volatile stocks like Varta: Good chances of profit, nothing for the unprepared

Equity trading, like equity derivatives trading, is a speculative activity. The prospects of profit depend to a large extent on the experience and information of the investor, but not only. External factors of a political or economic nature cannot always be predicted, even less events such as the Corona pandemic. When it comes to particularly volatile stocks, the bar is even higher. This raises the question of whether one should really invest in stocks in times of crisis. Although the pronounced price fluctuations allow good profit taking, the risk of loss is much higher at the same time, in short: “No risk, no fun”.

Particularly worthwhile stocks from the VDAX such as the list leader Varta are therefore not necessarily suitable for beginners. Anyone who wants to engage in short-term trading should prepare themselves thoroughly so that no panic arises during stock trading. Thanks to the educational offerings available on the Internet and at many brokers, even beginners can gradually familiarize themselves with the basic knowledge of trading and put the contents learned into practice with a demo account – all this without financial risks. The use of such free learning and practice opportunities is a valuable aid in later trading, allows insights into one’s own risk behavior and helps to mitigate possible losses.

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