Volatility – Friend or Foe?

June 3, 2020

A frequent question that most of our investors ask nowadays, is it a good or bad time to invest when there is high market volatility? Let’s try to go by a simple logic, high volatility means that a stock’s price moves a lot. Even if you were the best trader in the world, you would never make any profit on a stock with a constant price (zero volatility). In the long term, volatility is good for traders because it gives them trading opportunities.

Because people tend to experience the pain of loss more acutely than the joy of gain, a volatile stock that moves up as often as it does down, may still seem like an unnecessarily risky proposition. However, what seasoned traders know that the average person may not, is that market volatility actually provides numerous money-making opportunities for the patient investor. Investing is inherently about risk but risk works both ways. Each trade carries with it the risk both of failure and of success. Without volatility, there is a lower risk of either.

In the securities markets, volatility is often associated with big swings in either direction. For example, when the stock market rises and falls more than one percent over a sustained period of time, it is called a “volatile” market. An asset’s volatility is a key factor when pricing options contracts.

Volatility often refers to the amount of uncertainty or risk related to the size of changes in a security’s value. A higher volatility means that a security’s value can potentially be spread out over a larger range of values. This means that the price of the security can change dramatically over a short time period in either direction. A lower volatility means that a security’s value does not fluctuate dramatically, and tends to be steadier.

Let’s see what kind of volatility we are currently seeing on example of Gold spot price (XAU/USD).

, Volatility – Friend or Foe?

Gold prices have plummeted more than 2.2% this week with XAU/USD under pressure after turning from long-term uptrend resistance last week. While the risk remains for a deeper set-back, the sell-off is now approaching initial support hurdles that could interrupt the current decline.

XAU/USD has been in consolidation just below key resistance – from a trading standpoint, the risk remains for a deeper setback in prices while below the 1726 level. A topside breach on May 14th briefly registered high at 1765, before reversing with price now retracing more than 61.8% of the monthly range. The decline takes gold into parallel support of the dominant slope extending off the late April lows.

A break/close lower exposes the objective May open at 1685 backed by the monthly opening-range lows/pitchfork support at 1669 (key). Daily resistance is now back at 1732 with a breach above the April highs at 1747.

A closer look at Gold price action sees XAU/USD trading within the confines of an ascending pitchfork formation extending off the late-April lows with an embedded channel formation guiding this most recent decline. Initial support rests at 1690/1692, backed closely by 1685 risk for acceleration if broken with such a scenario exposing the monthly lows at 1669. Initial resistance eyed at the 100% extension at 1714 backed by the upper parallel. Ultimately, a breach/close above the weekly open at 1735 would be needed to put the bulls back in control.

Gold prices are in correction off the monthly/yearly high with the pullback now approaching initial levels of up-trend support. Ultimately, a larger pullback may offer more favorable entries closer to uptrend support. The COT report suggests there are more buyers at these levels as compared to the sellers, so typically if we take a contrarian view to crowd sentiment, and the fact traders are net-long, suggests Gold prices may continue to fall.

Although this volatility can present significant investment risk, when correctly harnessed, it can also generate solid returns for shrewd investors. Even when markets are choppy, crash, or surge, there can always be opportunity.

You have to accept a degree of volatility, if you want your invested wealth to grow ahead of inflation over time. The good news is that with careful planning, you can largely avoid the downside, while taking full advantage of the potential upside. At the other end of the risk scale, cash demonstrates low to zero volatility. You know what you will get, and it won’t be much.

Nevertheless, it doesn’t come without a risk, that’s why it’s crucial to select the right investment firm to manage your portfolio, consistency and achievable performance is the key.

Reach out to AIX Investment Group and let one of our Financial Advisors leads you through our track record over the last 13 years, as we know it, fact is better than fiction.