Volatility trading
Volatility can spark new opportunity. Discover how you can take advantage of fast-moving markets, with tools to help you find the right trade.
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Why trade volatility with us?
Trade over 17,000 markets, including the VIX and the EU Volatility Index1, plus volatility ETFs including the VIX ETF.
Enjoy low, competitive spreads – consistently tighter than the underlying market, even when volatility increases.2
Minimise your risk, even in volatile market conditions, with our range of effective risk management tools.
Trade our out-of-hours CFDs on stocks offered anywhere.
Evaluate your trading performance with our trade analytics tool. Explore your personal trading data, identify mistakes and build on successes.
Stay on top of market movements and key events with custom alerts by text, email or push notification.
What is volatility trading?
When you trade volatility, you predict the stability of an asset’s value. Instead of trading on the price rising or falling, you take a position on whether it will move in any direction.
This is especially valuable when world events are driving market uncertainty. Expecting a major market reaction, but unsure which way it will go? Use volatility trading to take a view – and profit, if you’re right.
Ways to trade and manage volatility
Volatility in traditional markets. Indices that track volatility. Options contracts. Three ways to trade fast-moving prices.
- Volatile markets
- VIX
- Options
Find volatility in traditional markets
Volatility can hit almost any market, driven by macroeconomic events or factors unique to one sector.
Which markets are most volatile?
While periods of volatility can sometimes be triggered by world events, some assets are naturally more volatile than others and move by greater percentages in a normal day. Take a look at some examples in the major asset classes.
- Indices
- Commodities
- Forex
Dow Jones
Indices with fewer constituent companies tend to be more volatile than others, since a movement in any single company will have greater impact on the wider index. That’s why the Dow (Wall Street), which has 30 constituents, usually sees more volatility than the S&P500, with 500 constituents
The DAX
Likewise, the DAX (Germany 40) is often more popular with traders than the FTSE 100, which has more constituents and is consistently less volatile. The DAX also trades in euros, meaning it tends to react more to events affecting EUR/USD – the most liquid currency pair.
NASDAQ 100
The NASDAQ 100 is usually one of the most volatile major indices, thanks to its cluster of high- growth technology companies like Amazon, Facebook, Alphabet and more. Any events that impact the world of technology are likely to affect these companies and the wider index.
Oil
Oil prices are easily disrupted and well-known for volatility. Take the 2020 price war, which saw record increases in supply meeting a slump in demand, causing the Brent crude price to plummet.
Gold
It’s a traditional safe haven for investors in uncertain markets. But during the coronavirus pandemic, even gold seemed to lose its lustre – its price becoming surprisingly volatile.
Soft commodities
Inconsistent weather and unpredictable growing conditions mean that soft commodities – like corn, wheat or cocoa – are hotspots for volatility. Demand for these commodities can also be affected by local tariffs or international sanctions.
GBP/USD
The value of the pound against the dollar typically reacts strongly to any political upheaval or uncertainty in the UK. Recent examples have included Brexit and its fallout, as well as the spread of the Covid-19 virus. This caused a flight to the dollar – considered a safe haven – driving down GBP/USD.
EUR/USD
These two behemoth currencies have also caved in to recent market turbulence. As the coronavirus spread across Europe, EUR/USD met a period of unusual volatility.
Minor and exotic FX pairs
These currency crosses, containing currencies like the Mexican peso, Turkish lira or Russian ruble tend to have low liquidity and greater risks associated with emerging market economies. Volatility is more common here, as they’re prone to being affected by external factors like geopolitical events or trade disputes.
Trading the volatility index (VIX)1
Trade IG's CFDs on VIX market, and you’re taking a view on the future political and economic landscape. The index usually rises in line with global instability and falls when prospects are clearer.
You can get an idea that CFDs on VIX market’s likely direction from the price of safe-haven assets like gold and the dollar, which are usually pushed up by growing demand during uncertain times.
You can also look to the yield curve: a fall in long-term yields combined with a rise in short-term yields is normally linked with growing fear in the markets. This happens when investors turn to the bond market rather than riskier assets like stocks. Since most market sell-offs are volatile, an inverted yield curve suggests that VIX market is likely to rise and stocks to fall.
Plus, you can trade the CFDs on EU Volatility Index (VSTOXX), which tracks the volatility of Euro Stoxx 50 options.
Trading volatility with options
Options are contracts that give you the right – but not the obligation – to buy or sell an underlying asset before a certain date.
They’re ideal for trading volatility, as you can use them to take a position on a wide range of financial assets in rising, falling or even flat market conditions. This means you can even use them to trade low volatility!
Open an account now
Open an account now
Fast execution on a huge range of markets
Enjoy flexible access to more than 13,000 global markets, with reliable execution
Deal seamlessly, wherever you are
Trade on the move with our natively designed, award-winning trading app
Feel secure with a trusted provider
With 45 years of experience, we’re proud to offer a truly market-leading service
Open an account now
Open an account now
Fast execution on a huge range of markets
Enjoy flexible access to more than 13,000 global markets, with reliable execution
Deal seamlessly, wherever you are
Trade on the move with our natively designed, award-winning trading app
Feel secure with a trusted provider
With 45 years of experience, we’re proud to offer a truly market-leading service
Find opportunities to trade volatility
Stay informed about potential volatility with our free alerts, saving you time by monitoring the markets on your behalf.
You can set up automated messages by email, SMS or push notification to let you know whenever conditions or events that you specify occur. We can alert you to:
Price changes
Get notified whenever a market moves by the percentage or number of points you specify.
Price levels
Find out whenever a market hits a price of your choice.
Technical conditions
Know when your chosen technical conditions have been met by a market. Create alerts using a wide range of popular indicators like Moving Average, MACD and Bollinger Bands.
Economic events
Set up economic calendar alerts to get advance notice on upcoming events and announcements. Plus, you'll receive macroeconomic figures as soon as they're released.
Manage your risk
Minimise your risk, even in volatile market conditions, with our range of risk management tools.
Attach a guaranteed stop to your trade to put a cap on your downside risk, so your position is closed at your chosen price. They’re free to attach, and you'll only have to pay a fee if your stop is triggered.
Keep an eye on your running balance – always visible in our platform or app – so you can quickly add funds if needed.
Volatility trading strategies
A fundamental understanding of the forces driving each market can help you predict volatility in an asset or sector. However, there are also technical tools you can use to spot potential volatility in almost any market.
For example, narrow price action with a shrinking Bollinger Band suggests volatility is dropping – but this is often followed by a sharp rise. Traders in this situation look for a significant breakout to signal a directional surge.
Average True Range (ATR) (ATR), meanwhile, is a technical indicator which averages out a market’s price range over time. You can add the indicator to any market, over any timeframe, to help work out the historical price volatility or range.
An ATR added to a daily timeframe of an index would identify how many points the index moves over (on average) the day. Similarly, adding an ATR to an FX pair on an hourly timeframe would identify how many points/pips (on average) the FX pair moves in an hour.
FAQs
What does volatility mean in trading?
Volatility is the likelihood of a market making major short-term price movements at any given time. Highly volatile markets are generally unstable, and prone to making sharp upward and downward moves. Most highly volatile assets typically come with greater risk, but also greater chance of profit. This is why most traders try to match the volatility of an asset to their own risk profile before opening a position.
What causes volatility?
Market sentiment and imbalanced supply and demand are major driving forces of volatility – and both can be influenced by economic crises, political developments, company announcements, macroeconomic indicators and so on.
What indicators can be used to identify volatility?
Bollinger bands and Average True Range (ATR) are the two most popular technical indicators used to identify market volatility. These take different approaches to looking at volatility and are often used together when examining the markets.
Try these next
Find out more about how you can open an account, research your first trade, and open a position.
Get expert commentary and insight on major indices from our analysts.
Find out more about our transparent fee structure.
1 We price our Volatility Index (VIX) and EU Volatility Index contracts in a different way to the rest of our cash index markets. Rather than aiming to replicate the underlying index price, we follow the method used to derive our undated commodity prices. This means there is a difference between our undated price and the underlying index price on these markets. Funding is also calculated in line with the undated commodity method. Please see our overnight funding page for more details.
2 Based on a comparison between IG spreads and the underlying Dow Jones spread during February 2020.
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