How to Handle a Roller Coaster Market
Understanding market fluctuation is among the top keys for day trading.
Markets are always going up and down. If the stock market trends up over time, it’s called a bull market. If it trends down, it’s called a bear market. But for a day trader, you need to understand market fluctuation at a much deeper level.
- What makes markets fluctuate?
- Why do stocks break out or break down?
- How do news and psychology affect the stock price?
If you’re going to be successful as a day trader, you need to ask questions like these and do some research.
In this brief guide, I’ll explain the concept of stock market fluctuations and give you four key tips for day trading in a fluctuating market.
What Is Market Fluctuation?
To understand stock market fluctuations, you first need to define ‘the market.’
The big picture: The market is all the different securities sold on any given exchange.
When you see news headlines like “Dow Plunges 1700 Points!” you’re only reading about a very limited number of stocks. When the financial news anchor says “the markets continued to fall today …” they’re talking about stock indexes.
Stock indexes are groups of stocks, like the Dow Jones Industrial Average or S&P 500, that help track overall market trends and sentiment. But the numbers for the index don’t describe individual stock prices. If an index is down for the day, it doesn’t mean every stock has gone down in price.
When you talk about market fluctuation, there’s general market fluctuation. That’s the indexes. But there’s also specific market fluctuation as applied to an individual stock. As a penny stock trader, that’s what I focus on.
The definition of market fluctuation according to Defined Term is “the rise or fall in a security’s price or portfolio’s value within a short-term period; may be slight or dramatic depending on market and other conditions.”
Why Does the Stock Market Fluctuate?
At the most basic level, stock market fluctuations are a matter of supply versus demand.
Supply is the number of shares available and demand is the willingness for someone to pay a certain price. When there are more buyers than sellers, the price goes up. When there are more sellers than buyers, the price goes down.
There are underlying reasons why there might be more buyers or sellers at any given time — and this is super important if you want to be a day trader.
Understanding why stock prices go up and down can potentially help you make better trades. And making better trades can potentially help you be more profitable more of the time.**
What Makes Stocks Go Up and Down?
The good news is, once you know what causes the market to fluctuate, you have a good understanding of what makes individual stocks go up and down. The underlying indicators are often the same.
For example, big news events can create huge market fluctuations. Dial that down to individual stocks and you’ll see that worldwide news, sector or industry news, and company news all impact share prices.
1. Current Share Price
When you go open your trading software, the current share price reflects daily stock price fluctuation. But that doesn’t mean the price on your screen is what you’ll pay if you buy 1,000 shares in the next five minutes.
To better understand how it works, here’s a brief description of bid, ask, and spread. Study this, because it can potentially make a big difference for your trades.
Bid is like making an offer on a house. For example, say you go view a house. You know what the seller is asking for the house. You decide you like the house and make a bid — an offer based on everything you know about the house and the market.
Say you know there’s an issue with the plumbing and the owner has done a nice job hiding it with a little cosmetic DIY. You offer lower than the asking price because you know it will cost you both dollars and time to get it fixed.
Bid price is the same idea in the stock market. It’s an offer made by a trader or investor to buy a certain number of shares at a particular price.
Now, as a penny stock day trader, I’m not looking at the plumbing — I’m looking at my charts, the catalyst behind the stock price move, ease of entry and exit, and other criteria.
But at some point, if I decide it’s a good trade, then I make a bid.
Back to our house example.
Let’s say the seller of the house wants a certain amount of money for the house. It might not be exactly in line with your offer. But since you made an offer, the seller has to decide if they’re willing to take it.
In the stock market, an ask price is what the seller is willing to accept for a security. Like the bid, there’s often a specific number of shares associated with the ask. In other words, the seller is willing to sell x number of shares at y price.
The terms bid and ask are used in every market — from forex to bonds, stocks, and derivatives such as futures and options.
The spread is the difference between the bid and ask prices of a stock.
For example, let’s say you want to open a small position, say, 1,000 shares of Company Q. You’re willing to pay $1 per share. But the ask price on the market when you make the trade is $1.10 per share. The spread is 10 cents.
Why is this important to you? The spread can make what seems like a good setup into a not-so-good setup. See, the spread is determined by supply and demand — just like the price.
When there’s high trading volume — meaning you can get in and get out of a trade much easier — then the spread narrows.
But if volume drops then you might be stuck in a position. You could be caught trying to buy or sell at the wrong price. Then you might have to adjust your ask or bid price to execute the trade.
Before I let you go just yet… I have four key tips I want to share with you on what you should do in a fluctuating market.
I’ll keep it brief since I’m sure you’re busy on the weekends…
But don’t forget to check your inbox tomorrow!
— Tim Sykes
Editor, Penny Stock Millionaires