Investors generally fear volatility. They are taught to do so by financial advisors who use the word as a pseudonym for market declines and the associated losses, and who see it as a measure of risk. They will even often show you a scatter chart with volatility on one axis and returns on the other, as if the two things are mutually exclusive, and tell you that you want to be in the upper left corner, where returns are high and risk is low. Traders, on the other hand, understand that that is BS.
First off, return on an investment is a reward for risk, so expecting to maximize returns while minimizing risk is, to say the least, naïve. Secondly, equating risk with volatility makes no sense, particularly to someone with a trading mindset. Yes, volatility involves downward movement, but it also involves sharp moves up. A big drop is not volatility, it is a big drop, and moreover one that you can easily profit from by being short. The real risk to traders is a lack of volatility…no movement, no money!
That is why, from a trading perspective, volatility is your friend. Without it, moves are ill-defined and always subject to random events or news. With it, you can get in and out quickly, decreasing the chances of some political statement or world event creating a big move in the opposite direction to that suggested by all your hard work and analysis. You should welcome it, but that doesn’t mean that you shouldn’t respect it.
Many people believe…