Market volatility is how wildly prices swing and the pace at which these prices move higher or lower. These can be prices for just anything. Market volatility has been thoroughly studied, described and measured in the stock market. Market volatility is usually determined by calculating the difference between the returns of the same market or security index.
In other words, market volatility is described as the amount of risk or uncertainty in regards to the changes in the value of the security. If the market volatility is high, it can be translated that the security’s cost is likely to be spread out in a large set of values.
This means that the price of the security can change haphazardly within a brief period and this can be either upward or downward. A lower volatility means that the value of the security does not change rapidly, but changes at a steady pace in a given period.
Controlling the effects of market volatility
- Using basic analysis of values. Here, every trader should aim to try to avoid or reduce downward market volatility. This makes the basic value strategies a very critical part of investing. The values can assist someone to avoid buying overpriced stocks, which are prevalent at market tops.
- Develop a drawdown plan. It is essential for every investor to have a well-developed drawdown plan as part of his or her risk management strategy. This is because a major part of an asset allocation strategy is determined by how you can manage, control or reduce a portfolio drawdown.
- You can use a pro-active asset allocation approach. The allocation of fixed or strategic assets makes perfect sense for an investor because they know that evaluation is the major determinant of any long-term investment. Once an investor has an understanding of the fundamental value analysis and has identified his or her risk management plan, they can easily choose their suitable asset allocation. A tactical asset allocation gives someone the flexibility to make allocation decisions based on capitalizing on the possibility of a positive outcome. This means, being able to allocate under-valued assets more aggressively and avoid assets without a margin of safety.