The volatile market is the last type of market we are going to discuss and it is characterized by high risk, high returns, and extremely short timeframes. Prices constantly spike up and down, volumes are high, and large moves take place within days if not minutes. Volatile markets occur when the market fundamentals are unstable and uncertainty has increased. These types of markets are often observed during market crashes and the subsequent recovery from these sharp declines.
I consider myself lucky to have been part of the hectic markets that we observed in late 2008 and early 2009. The volatility was so high and so many black swans took place that all models were failing because of the extremes that were taking place at this point. A 10-20% move was the standard in the market at that point in time.
I think a picture is worth a thousand words. See Citigroup’s stock on March 19th 2009 (keep in mind stock has been adjusted for reverse stock split as the price back then was around $3.50). The previous day the stock closed at $30. Then next day the stock was up 20% at the open, it pushed another 10% higher to $39 within minutes of the open to collapse immediately and eventually close around 15% down at $26.
I doubt anyone would have predicted such wild action the previous day, although I am pretty sure no one was surprised to see such a move as this type of price action was becoming the norm and people were starting to get used to it. So as you can see one could have made a significant amount of money on this day if he was on the right side of the market. The problem is that things happen so quickly and prices move so swiftly within seconds that it can be extremely difficult and next to impossible to react in time. This is especially the case if the investment portfolio contains multiple positions that all have to be manually managed at the same time.
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