During a strong bull trend 80% of investors are bullish and 20% are bearish – which is why the market rises quickly. The opposite is true of a bear trend. But during both bear and bull trends there is far less uncertainty among investors as to what will happen next. Uncertainty usually expresses itself in sideways markets. During a sideways market (sometimes called a period of “consolidation”) opinion about the future direction of the market is evenly balanced between bulls and bears.
From a technical perspective, the further that a chart departs from its average, the more volatile it becomes and the less certain the future becomes. The most predictable chart is a straight line – the further a chart departs from that, the less predictable it becomes. At the same time, the more volatile a share becomes, the more opportunity there is for capital gain. So, we can reduce this discussion to three words:
Volatility = Unpredictability = Risk
And risk is not necessarily a bad thing because it brings with it the opportunity for profit.
For the private investor it is important to be able to gauge the level of volatility in the market. One of the best ways to do this is by using Bollinger Bands. Read More