Trading Volatile Stocks With Technical Indicators

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Trading Volatile Stocks With Technical Indicators

Volatility is defined as the dispersion of returns for a certain asset or market index across time. Short-term traders, for example, calculate it as the average difference between a stock’s daily high and low, divided by the stock price. Because the percentage change is bigger with the first, a stock that moves $5 per day with a $50 share price is more volatile than a stock that moves $5 per day with a $150 share price.

Trading the most volatile stocks is an effective strategy to trade since these equities theoretically have the most profit potential. Many traders seek out these equities, which are not without their own risks, but they confront two major challenges: how to locate the most volatile companies and how to trade them using technical indicators.

Key Takeaways

  • Traders often seek for the most volatile stocks in the market in order to profit on intraday price movement and short-term momentum techniques.
  • Several online screener tools may assist you in identifying and narrowing down the list of volatile stocks to trade.
  • While volatility has the potential to be beneficial, it is also dangerous and may result in higher losses.

How to Find the Most Volatile Stocks

Finding the most volatile stocks is not difficult, and it no longer needs continuous research or stock screening. Instead, you might build up and run an ongoing screener for stocks that have a high volatility.

StockFetcher is one example of a filter for tracking highly volatile equities. Stock Fetcher will choose stocks with average daily changes of more than 5% (between the open and close) during the last 100 days using customisable criteria.

Volume is particularly important when trading volatile equities since it allows for easy entry and exit. This tool may also be used to filter equities, such as those priced between $10 and $100 and with an average daily volume of more than 4 million in the last 30 days. Furthermore, if you are only interested in equities and not exchange-traded products, a filter such as “exchange is not Amex” will assist you avoid leveraged ETFs that could otherwise show in the search results.

A more time-consuming method is to personally search for volatile stocks every day. provides a free version that displays the top gainers, losers, and most volatile equities for each trading day. Use the screener tool to narrow down your search results based on market capitalization, performance, and volume. This method of narrowing the search offers traders with a list of equities that meet their particular parameters.

Nasdaq also publishes a list of the top gainers and losers on the NASDAQ, NYSE, and AMEX stock exchanges. These are unfiltered findings that solely show volatility on that particular day. As a consequence, the list identifies possible equities that may continue to be volatile, but traders must go through the results to determine whether stocks have a history of volatility and sufficient volume to merit trading.

Trading the Most Volatile Stocks

Volatile stocks are prone to abrupt movements, necessitating patience while waiting for entry but swift action once they occur. Certain indicators can be used to trade volatile stocks, but the trader must also monitor price action—whether the price is making higher swing highs or lower swing lows relative to previous waves—to determine when to take indicator signals and when to ignore them.

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Here are two technical indications you may use to trade volatile stocks, as well as what to watch for in price activity.

Keltner Channels

On a stock chart, Keltner channels place an upper, middle, and lower band around the price activity. When the price is making higher highs and higher lows for an uptrend or lower highs and lower lows for a downtrend, the indicator is most beneficial.

During a strong rally, the price will “ride” the upper Keltner channel, and pullbacks will often near but not surpass the middle band. As a result, the mid-band is a possible entrance point. A stop order should be placed about halfway between the mid-band and the lower band. Just above the top band is an exit.

Apply the same logic to downward trends. Price often follows the lower Keltner channel line, while pullbacks frequently approach the middle band but do not surpass the top Keltner line. As a result, the center line offers a short-entry region, with a halt just inside the upper Keltner line and a target just below the lower Keltner line.

The default measurements for Keltner channels on most charting tools are normally configured to utilize the last 20 price bars and an ATR Multiplier of 2x. The reward to risk ratio is normally 1.5x or 2x, which means that for every $1 of risk, the payoff potential is $1.50 to $2.00.

Figure 1. Keltner Channels (20, 2.0 ATR) Applied to 2-Minute Chart. Image by Sabrina Jiang © Investopedia2021

Because Keltnerchannels fluctuate with the price, the target is set at the moment of the transaction and maintained there.

One benefit of this method is that an order is now awaiting execution in the middle band. Thus, timing the entry is less ambiguous—and after all of the orders are placed, the trader does nothing but sit back and wait for either the pre-set stop or target order to be filled.

The technique may be more actively handled for more hands-on traders. The objective may be changed to capture extra profit during a really strong trend. Only after the transaction becomes lucrative can the stop and risk levels be adjusted; risk should never be raised during a trade.

The drawback of this method is that it works well in trending markets, but once the trend ends, losing trades will begin since the price is more likely to swing back and forth between the upper and lower channel lines.

Filtering transactions based on trend strength might assist in this respect. During an upswing, for example, if the price fails to hit a higher high shortly before a long entry, avoid the trade since a further downturn is likely to wipe out the transaction.

Figure 2. Keltner Channels (20, 2.0 ATR) Applied to 2-Minute Chart. Image by Sabrina Jiang © Investopedia2021

Stochastic Oscillator

Another effective indicator for trading the most volatile equities is the stochastic oscillator. This method works well on companies that are range-bound or lack a clear trend. Volatile stocks often settle into a trading range before determining which way to trend next. Because a powerful move might rapidly produce a significant negative position, it is important to wait for some evidence of a reversal. This validation is provided by the stochastic oscillator.

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When the price lacks apparent direction and is mostly moving laterally, sell towards the top of the range when the stochastic crosses over 80 and then falls back below. Set a stop order right above the recent high, with a goal of 75% of the way down the range. For example, if the range has a high of $10 (from low to high), set a goal of $2.50 above the low.

Similarly, when the stochastic falls below 20 and then rises above it, place long positions towards the bottom of the range. Set a stop below the most recent low and aim for 75% of the range. If the range is $10, the objective is $2.50 below the high.

When the price reaches the stochastic trigger level, trades should be entered (i.e., 80 or 20).Do not wait for the price bar to finish; by the time a 1-minute, 2-minute, or 5-minute bar finishes, the price may have moved too far toward the objective to make the deal viable. Also, while in a trade, ignore conflicting indications and let the objective or stop fall. If the stock continues to range after hitting the objective, a signal in the opposite direction will arise soon after. Figure 3 depicts a short transaction, which is immediately followed by a long trade, which is then followed by another short trade.

The stochastic oscillator has a standard period of 12 and a %K of 3.

Figure 3. Stochastic Applied to 2-Minute Chart. Image by Sabrina Jiang © Investopedia2021

The range in the image above is $0.16 in height ($16 minus $15.84), thus 25% of $0.16 is $0.04. As a result, subtract $0.04 from the top of its range, which is $16, to generate a target for long positions of $15.96. Similarly, add $0.04 to the range low of $15.84 to generate a target price for short positions of $15.88. These are your objectives for long and short positions while the range is in force. This manner, the objective is more likely to be met even if the price does not return to the top or bottom of the range whether long or short.

Consider the diagram again. The stochastic climbs above 80 and then falls below it for the first short trade just after 1:30 PM. This indicates a short trade. As soon as the indicator crosses below 80 from above, sell at the current price. Place a stop just above the current price high that has just created. Set your stop loss at $15.88. Nothing further should be done until the halt or objective is achieved. The objective is met less than an hour later, allowing you to exit the deal profitably.

Since the stochastic has fallen below 20, place a long trade at the current price as soon as it rises above 20. Place a stop below the recently created price low and set an exit goal of $15.96. This transaction lasts roughly 15 minutes before achieving the successful trade objective. Another short trade emerges shortly after the last one; enter short at the current price when the stochastic crosses below 80, set a stop above the recent price high, and set an exit goal of $15.88. The goal is attained in less than 30 minutes.

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This method is important because it allows us to wait for the price to reach a good level, probably undervalued, even if only momentarily. Before entering the trade, we may wait to observe whether the price begins to increase from this favorable price level and move in our recommended trading direction. As a result, a pretty tight stop may be applied, and the return to risk ratio is usually 1.5:1 or higher. The primary problem is that erroneous signals are produced. When the indicator passes the 80 line (for shorts) or the 20 line (for longs), it might result in losing transactions before the positive move begins.

Because the stochastic moves slower than the price, the indicator may deliver a signal that is too late. When the entry indications appear, the price may have already moved considerably toward the objective, lowering the profit possibility and maybe making the transaction unprofitable. Based on the goal and stop, the return should be at least 1.5 times larger than the risk at the moment of entry.

The Bottom Line

Volatile equities are appealing to traders due to their high profit potential. Trending volatility stocks frequently have the most profit potential since there is a directional bias to help traders make judgments. In strong trends, Keltner channels are advantageous since the price often just pulls back to the middle band, offering an entrance. The disadvantage is that losing trades will occur when the trend stops. Monitoring price movement and ensuring that the price makes a higher high and higher low before initiating an uptrend trade (lower low and lower high before beginning a downtrend trade) would assist overcome this flaw.

Volatile stocks do not necessarily trend; they often oscillate. When the stochastic hits an extreme level (80 or 20) during a range and then reverses, it suggests that the range is continuing and presents a trading opportunity. To act on trending or range chances, keep an eye on both the stochastic and Keltner channels. However, no indication is perfect; constantly observe price activity to assist establish whether the market is trending or range so that the appropriate instrument is used.

Profiting from volatility requires a thorough understanding of technical analysis, which includes both chart patterns and technical indicators. If you are new to technical analysis or want to brush up on your abilities, theInvestopedia Academy’sTechnical Analysiscourse gives an in-depth explanation of the technical ideas you need to become a successful trader.

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