Originally posted October 16, 2018. Last Updated: April 18, 2021
What causes Choppy Action?
Typically, following a market sell-off and subsequent bounce, the market will enter a period of choppy action with different moves in different sectors. Some sectors will bounce back, others will continue their downward trend, and still others will simply stay level with very little to no movement.
Large hedge funds and institutional advisers will use the market’s volatility to adjust their positions by buying and selling large amounts of stock which can cause the market to move quickly to the upside and downside with little to no warning.
Planning is Everything
What actions to take during extreme volatility can be incredibly difficult to determine. What if the market continues higher after profits are taken? What if it heads lower after a position is opened?
Developing and sticking to a gameplan can help investors protect their portfolio and prevent snap decisions which can be detrimental to long-term gains.
If you don’t already have a trading plan, check out our feature: “Don’t Gamble with Your Portfolio” to learn how to create one.
The market’s volatility may offer a buying opportunity on stocks you’ve been wanting to open a position in or when you could add to an existing position.
You can also use the volatility to sell stocks that move up to levels where you can lighten up, reducing risk exposure or taking profits.
Buying or selling during market volatility is reasonable as long as the action you take is part of your trading plan and not the result of a snap decision.
Otherwise, use the market’s confusion to your advantage – avoid checking your portfolios regularly if you’re feeling like you may be missing out and spend time doing homework: research stocks you’ve been interested in and review your shopping list so you can keep an eye on stocks that may be approaching interesting levels.
Investors must remember that after sell-offs or rallies, approaching the market with extreme caution is imperative. Even the experts can’t predict with any accuracy which way the market will head next.
The following adage comes to mind whenever we see volatility in the markets:
If you don’t know what to do, doing nothing at all is usually the best thing to do.