Use technical indicators to trade volatile stocks

Volatility can be defined as the divergence of returns for a given security or market index over a period of time. For example, short-term traders quantify this as the average difference between the stock’s daily highs and daily lows divided by the stock price. Therefore, stocks with a stock price of $5 per day and a stock price of $50 are more volatile than stocks with a stock price of $5 per day and a stock price of $150, because the former has greater percentage fluctuations.

Trading stocks with the largest volatility is an effective way of trading because, theoretically, these stocks have the greatest profit potential. Not without risk, many traders look for these stocks, but face two main problems: how to find the most volatile stocks, and how to trade using technical indicators.

Key points

  • Traders usually look for stocks with the most volatility in the market to take advantage of intraday price movements and short-term momentum strategies.
  • Some online screening tools can help you identify and narrow down the list of volatile stocks you wish to trade.
  • Although volatility may be profitable, it also has risks and may lead to greater losses.

How to find the most volatile stocks

Finding the most volatile stocks is not very complicated and no longer requires constant research or stock screening. Instead, you can set up and run continuous filters for stocks that continue to fluctuate.

Pickup machine This is an example of a filter that you can use to track very unstable stocks. Applying customizable filters, Stock Fetcher will select stocks that have fluctuated more than 5% per day (between opening and closing) in the past 100 days.

When trading volatile stocks, volume is also essential for easy entry and exit. You can also use this tool to filter stocks, for example, stocks whose prices are between $10 and $100 and have an average daily trading volume of more than 4 million in the past 30 days. In addition, if you are only interested in stocks and not exchange-traded products, adding filters such as “Exchange is not American Express” can help avoid leveraged ETFs that may appear in search results.

A more in-depth research option is to manually search for volatile stocks every day. Finviz.com A free version is provided to provide the biggest winners, biggest losers and the most volatile stocks for each trading day. Use the filter tool to further filter the results of market capitalization, performance and trading volume. In this way, the search is narrowed down, and traders are provided with a list of stocks that match their exact specifications.

Nasdaq also listed the biggest winners and losers of Nasdaq. New York Stock Exchange, and American Express comminicate. These are not filtered results, but only reflect the volatility of the day. Therefore, the list provides potential stocks that may continue to fluctuate, but traders need to view the results separately to see which stocks have a history of volatility and have sufficient trading volume to guarantee trading.

Stocks with the most trade volatility

Volatile stocks are prone to severe volatility, which requires patience while waiting for entry, but requires quick action when entry occurs. Certain indicators can be used to trade volatile stocks, but traders must also monitor price behavior-observe whether the price is forming a higher swing high or a lower swing low relative to the previous wave-to determine when to take it Indicator signals and when to leave alone.

Below are two technical indicators that you can use to trade volatile stocks, as well as notes on price behavior.

Kentner Channel

The Keltner channel sets up, middle, and down bands around price movements on the stock chart. This indicator is most useful in strongly trending markets when prices create higher highs and higher lows in an uptrend, or lower highs and lower lows for a downtrend.

In a strong uptrend, the price will “ride” on the Keltner channel, and the pullback will usually hardly reach the middle band and never exceed the lower band. Therefore, the mid-band is a potential entry point. The stop loss order should be placed approximately half to two-thirds between the mid-band and the low-band. The exit is located directly above the upper belt.

Apply the same concept to a downtrend. Prices usually follow the lower Keltner channel line, and the callback usually reaches the middle band but does not exceed the upper Keltner line. Therefore, the middle line provides a short entry area-the stop loss is located inside the upper Keltner line, and the target is located below the lower Keltner line.

On most charting platforms, the default metric of the Keltner channel is usually set to use the first 20 price bars and use 2 times the average true range (ATR) multiplier. The return relative to the risk is usually 1.5 times or 2 times, which means that for a dollar of risk, the profit potential is between 1.50 and 2.00 dollars.


Figure 1. Keltner channel (20, 2.0 ATR) applied to a 2-minute chart.

Since the Keltner channel moves with the movement of the price, the target is placed at the time of the transaction and remains there.


One advantage of this strategy is that orders are waiting in the middle. Therefore, the entry time is not so vague-once all orders are placed, the trader does not need to do anything, just sit down and wait for the preset stop loss or target order to be executed.

For more hands-on traders, this strategy can be managed more actively. During a very strong trend, you can adjust your target to get more profits. Only when the transaction becomes profitable, the stop loss and risk level should be reduced; the risk will never increase during the transaction.

One disadvantage of this strategy is that it works well in trending markets, but once the trend disappears, losing trades will begin because the price is more likely to move back and forth between the upper and lower channel lines.

In this regard, filtering trades based on trend strength can help. For example, in an uptrend, if the price fails to make a higher high before the bulls enter the market, avoid trading because a deeper pullback may prevent trading.


Figure 2. Keltner channel (20, 2.0 ATR) applied to a 2-minute chart.

Stochastic oscillator

The Stochastic Oscillator is another indicator that can be used to trade the most volatile stocks. This strategy is most suitable for stocks that fluctuate within a range or lack a clear trend. Volatility stocks usually enter a range before deciding on the next trend. Since a strong trend can quickly create a large negative position, it is prudent to wait for some confirmation of the reversal. The Stochastic Oscillator provides this confirmation.

When the price lacks a clear direction and mainly moves laterally, once the Stochastic indicator rises above the 80 level and then falls below, sell near the top of the range. Place a stop loss order above the just formed high, with the target at 75% of the downward range. For example, if the range shows a high of $10 (from low to high), set the target at $2.50 above the low.

Similarly, when the Stochastic indicator breaks below 20 and rebounds to near the bottom of the range, establish a long position near the bottom of the range. Set a stop loss below the recent lows, with a target of 75% of the range. If the range is a high of $10, the target will be lower than the high of $2.50.

Once the price crosses the random trigger level (ie 80 or 20), a trade should be made. Don’t wait for the price bar to complete; by the completion of the 1-minute, 2-minute, or 5-minute bar, the price may run too far toward the target, making the transaction valuable. Also, ignore the opposite signal in the transaction; allow the target or stop being hit. Once the target is reached, if the stock continues to fluctuate, signals in the opposite direction will soon appear. Figure 3 shows a short trade, followed by a long trade, and then another short trade.

The Stochastic Oscillator uses a standard setting of 12 cycles, and %K is set to 3.


Figure 3. Stochastic indicator applied to the 2-minute chart.

In the image above, the height range is $0.16 ($16 minus $15.84), so 25% of $0.16 is $0.04. Therefore, deduct $0.04 from its range high of $16 to obtain a long position target of $15.96. Similarly, add $0.04 to the range low of $15.84 to obtain a short position target of $15.88. When the range is valid, these are the targets for your long and short positions. In this way, even if the price does not fully return to the top or bottom of the range when going long or short, the target is more likely to be hit.

Consider the picture above again. For the first short trade, just after 1:30 in the afternoon, the Stochastic indicator rose above 80 and then fell below 80. This marks a short trade. Once the indicator crosses below 80 from above, immediately sell at the current price. Place a stop loss immediately above the recent price high just formed. Set the exit goal to $15.88. Do nothing before reaching the stopping point or goal. The goal was reached in less than an hour, allowing you to exit the transaction and make a profit.

Since then, the Stochastic indicator has fallen below 20, so once it rises above 20, it enters a long trade at the current price. Quickly place a stop loss below the price low just formed, and set the target at $15.96. This transaction will last about 15 minutes before reaching the goal of profitable trading. Make another short trade immediately after the previous trade; when the Stochastic indicator is lower than 80, go short at the current price, set a stop loss above the recent price high, and set the target at $15.88. The goal was reached in less than 30 minutes.

The usefulness of this strategy is that it can help us wait for the price to reach a favorable level, a level that may be underestimated, even if only temporarily. Then we can observe whether the price will start to rise from this favorable price level and move towards our preferred trading direction before we enter the trade. Therefore, a relatively strict stop loss can be used, and the risk-reward ratio is usually 1.5:1 or higher. The main disadvantage is false signals. A false signal is that when the indicator crosses the 80 line (for shorts) or the 20 line (for longs), it may cause trading losses before the profit trend develops.

Since the stochastic indicator moves slower than the price, the indicator may also provide a signal that it is too late. When the market entry signal appears, the price may have moved substantially towards the target, which reduces the profit potential and may make the transaction unworthy. When entering the market, according to the target and stop loss, the return should be at least 1.5 times the risk.

Bottom line

Volatility stocks are attractive to traders because of their potential to make quick profits. Stocks with fluctuating trends usually provide the greatest profit potential because there are directional deviations to help traders make decisions. The Keltner channel is useful in strong trends because the price usually only falls back to the middle band, thus providing an opportunity to enter the market. The downside is that once the trend ends, losing trades will occur. Before entering an uptrend transaction (lower lows and lower highs for downtrend transactions), monitoring price movements and ensuring that prices form higher highs and higher lows will help alleviate this defect.

Volatile stocks are not always trending; they often whip back and forth. In an interval, when the stochastic indicator reaches an extreme level (80 or 20) and then reverses in another way, it indicates that the interval is continuing and provides trading opportunities. Monitor random channels and Keltner channels to take action on trend or interval opportunities. However, no indicator is perfect. Always monitor price movements to help determine when the market is in a trend or range to apply the right tools.

Profiting from volatility requires extensive use of technical analysis, including chart patterns and technical indicators. If you are not familiar with technical analysis or want to improve your skills, technical analysis Course in Investment Encyclopedia Academy Provides an in-depth overview of the technical concepts required to become a successful trader.

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