Trading Volatile Supplies With Technical Indicators
Stock Fetcher (StockFetcher.com) is an instance of a filter you can make use of to track very unpredictable supplies:
How to Find the Most Volatile Stocks
Using the above filters, Stock Fetcher will choose supplies with average steps greater than 5% per day (between the open and also close) over the past 100 days.
Stock Fetcher (StockFetcher.com) is an example of a filter you can use to track very volatile stocks:
Applying the above filters, Stock Fetcher will pick stocks with average moves greater than 5% per day (between the open and close) over the past 100 days. It also filters stocks priced between $10 and $100 and with average daily volume of over 4 million in the past 30 days. Furthermore, if you are only interested in stocks, adding a filter like "exchange is not Amex" helps avoid leveraged ETFs appearing in the search results.
A more research-intensive option is to look for volatile stocks each day. Finviz.com (free version) provides top gainers, top losers and the most volatile stocks for each trading day. Use the screener tool to further filter results for market capitalization, performance and volume. Narrowing the search in this fashion provides traders with a list of stocks matching their exact specifications.
Nasdaq.com lists the biggest gainers and losers on the NASDAQ, NYSE and AMEX. These are not filtered results and only reflect volatility for that day. Therefore, the list provides potential stocks that could continue to be volatile, but traders needs to go through the results manually and see which stocks have a history of volatility and have enough volume to warrant trading.
[Profiting from volatility requires extensive use of technical analysis, including both chart patterns and technical indicators. If you are new to technical analysis or want to brush up on your skills, the Technical Analysis course on the Investopedia Academy provides an in-depth overview of the technical concepts you need to become a successful trader.]
Trading the Most Volatile Stocks
Volatile stocks are prone to sharp moves, which requires patience in awaiting entries but quick action when those entries appear. As with any stock, trading volatile stocks that are trending provides a directional bias, giving the trader an advantage. Certain indicators can be used to trade volatile stocks, but the trader must also monitor price action – watching if the price is making higher swing highs or lower swing lows relative to prior waves – to determine when indicator signals are taken and when they are left alone. Here are two technical indicators you can use to trade volatile stocks, along with what to look for in regards to price action.
Keltner channels put an upper, middle and lower band around the price action on a stock chart. The indicator is most useful in strongly trending markets when the price is making higher highs and higher lows for an uptrend, or lower highs and lower lows for a downtrend.
During a strong uptrend, the price will "ride" the upper Keltner channel, and pullbacks will often barely reach the middle band and not exceed the lower band. The mid-band is therefore a potential entry point. A stop is placed roughly one-half to two-thirds of the way between the mid-band and the lower band. An exit is placed just above the upper band.
Apply the same concept to downtrends. The price often tracks the lower Keltner channel line, and pullbacks will often reach the middle band but not exceed the upper Keltner line. The middle line therefore provides a short-entry area – a stop is placed just inside the upper Keltner line and a target is below the lower Keltner line.
Keltner channels are typically created using the previous 20 price bars, with an Average True Range Multiplier to 2.0. The reward relative to risk is usually 1.5 or 2.0 to 1, meaning for $1 of risk the profit potential is $1.50 to $2.00.
Figure 1. Keltner Channels (20, 2.0 ATR) Applied to 2-Minute Chart