Most folks don’t like uncertainty. They prefer it when things are humming along.
So when volatility starts ramping higher, they head to the sidelines. Then they come back when things start to quiet down.
But that can be a big mistake…
Rising volatility allows you to boost your returns significantly. It also means a lot more trading opportunities are available.
That’s why you should embrace it. Volatility enables you to put your capital to work.
I expect volatility could ratchet higher soon. So we could be in for a dramatic last quarter of 2025…
Rising Volatility
A 0.25% interest rate cut tomorrow is locked in. The Federal Reserve telegraphed the cut early, so markets have been factoring it in for weeks.
So the market is focusing its attention on what happens after that rate cut…
Right now, the market is hoping that Fed Chair Jerome Powell will give a clear indication of several cuts ahead.
But no matter what he says, we could see increasing uncertainty and a rise in volatility ahead…
For example, if the Fed cuts rates tomorrow but says it’s a “one and done” scenario, the market is likely to sell off, having rallied off the prospect of multiple cuts.
On the other hand, if Powell hints at several further rate cuts ahead, the market could interpret that as a sign the economy’s in trouble. Why else would the Fed cut multiple times?
And again, that could lead to a sharp sell-off.
Either way, markets will have to deal with increasing uncertainty. So you need to brace for news that could rattle the markets…
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What Investors Miss
While others fear volatility, professional traders embrace it. They know it allows them to take their trading up another gear…
Bigger moves simply mean bigger potential returns in a shorter time. Those swings also allow you to take multiple bites at the same trade.
You also find out quickly if stocks are going to hold key levels…
For example, a previous support (or resistance) level might quickly erode if it’s hit with enough volume and bigger price swings.
And a lot of folks often miss how volatility enables you to better gauge risk. Those big swings are an immediate and visual reminder of just how far (and quickly) stocks can move.
You don’t have the luxury of indecision or time. You can’t wait for new buyers to bail you out of a bad position. By then, you’ve lost way too much money…
That’s why I’m concerned about everyone who has enjoyed the massive run off the April lows. Markets have repeatedly broken out to new all-time highs. All the while, volatility has tracked around yearly lows.
As the markets grind higher, it has kept handing out gifts. And it’s bred a false sense of security that this will continue indefinitely…
But it only takes one thing out of left field to set off a sharp sell-off… like an unexpected move from the Fed. By the time folks catch on, often it’s too late, and they can suffer eye-watering losses.
Yet if you’re ready to act and embrace that coming volatility, you could make more money in a few months than you would ordinarily make in a year.
So get your dry powder ready. When volatility returns, we’re going to be ready to strike.
Happy Trading,
Larry Benedict
Editor, Trading With Larry Benedict
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