Breaking News
Get Actionable Insights with InvestingPro+: Start 7 Day FREE Trial Register here
Investing Pro 0
Ad-Free Version. Upgrade your experience. Save up to 40% More details

Investing 101: Good Volatility vs. Bad Volatility

Stock MarketsNov 26, 2021 19:15
Saved. See Saved Items.
This article has already been saved in your Saved Items
Investing 101: Good Volatility vs. Bad Volatility

The trick to good returns is to buy the dip and sell the rally. This dip and rally is nothing but volatility. Often the stock market volatility is misunderstood with risk. I don’t deny that volatility brings risk, but there are two types: good and bad volatility.

Types of volatility Good volatility brings opportunities to buy the dip and earn significant returns, whereas bad volatility brings downside risk. If you learn to capitalize on volatility, you could make some good returns on your portfolio. Many technical indicators measure volatility and help you make a calculated guess on where the stock might head next. I said “guess” because there is no way you can predict a stock price with accuracy.

The four volatility measures I use are as follows:

  • Beta
  • Trading volumes
  • Relative Strength Index (RSI)
  • Support and resistance levels
The stock market has a beta of one. Most utility and telecom stocks have a beta of less than one, which shows they are less volatile than the market. These are necessities and have assured earnings, unless a major crisis, like the pandemic or trade war, disrupts the entire industry. Technology, commodity, and crypto-related stocks have a beta greater than one, indicating they are highly volatile.

For instance, Enbridge (TSX:ENB)(NYSE:ENB) has a beta of 0.92 and Lightspeed Commerce (TSX:LSPD) of 2.97. The TSX Composite Index and Enbridge stock surged 23% and 24%, respectively, whereas Lightspeed stock fell 15.5% year to date. The higher the beta, the higher the volatility. Now, the trick is to determine whether this volatility is good or bad.

Good volatility versus bad volatility High-volatility stocks are good for short-term trades (less than a year), whereas low-volatility stocks are good for a buy-and-hold strategy. Enbridge is a stock that you buy and forget. It has strong fundamentals, assured cash flows, a 26-year dividend-growth history, and market leadership.

Good volatility is when a stock rises in an uptrend but stays steady in a downturn, as long-term value investors hold a fundamentally strong stock. They grab this opportunity to buy the dip, driving the stock price to new highs. Bad volatility is when the stock rises in an uptrend and crashes in a downtrend, like Air Canada.

Descartes Systems (TSX:DSG)(NASDAQ:DSGX) is in a long-term uptrend with a beta of 1.04. In its five-year history, the stock has surged 279%. There have been dips, but the rally that followed pushed the stock to a new high. This is good volatility, as any dip is an opportunity to buy and increase returns.

Enbridge is relatively stable, with the stock price down 8.7% in the last five years. Its stock price is range-bound, as it does not rally beyond $51. Even if it does, the stock price does not stay at that level for long and sees a correction. Even this is a form of good volatility, as a rally follows at some point.

How to make money in good-volatility stocks For good-volatility stocks, RSI and support and resistance levels tell you the entry and exit price. RSI tells you whether the stock is overbought (above 70) or oversold (below 30). When a stock like Enbridge or Descartes is oversold, it is time to buy. At present, the two stocks are trading normally (RSI of 42-47), which means they might either rise or fall.

That is when the support level comes in. A support level is where the decline is expected to stop and demand to start accumulating. You gauge the support level by looking at the past few years’ trends and mark a price that the stock has hovered around in past downturns. This is a level beyond which the stock didn’t fall. As per my analysis, Enbridge has a support level of $39-$40. The opposite of support is resistance, and Enbridge’s resistance level is $51.

The stock is trading normally and could surge up to $53 (a 4.6% upside) or fall to $44 (a 13% downside). Holding is the best strategy for this stock at the moment.

The post Investing 101: Good Volatility vs. Bad Volatility appeared first on The Motley Fool Canada.

Fool contributor Puja Tayal has no position in any of the stocks mentioned. The Motley Fool recommends Enbridge and Lightspeed POS Inc.

This Article Was First Published on The Motley Fool

Investing 101: Good Volatility vs. Bad Volatility

Related Articles

Add a Comment

Comment Guidelines

We encourage you to use comments to engage with users, share your perspective and ask questions of authors and each other. However, in order to maintain the high level of discourse we’ve all come to value and expect, please keep the following criteria in mind: 

  • Enrich the conversation
  • Stay focused and on track. Only post material that’s relevant to the topic being discussed.
  • Be respectful. Even negative opinions can be framed positively and diplomatically.
  •  Use standard writing style. Include punctuation and upper and lower cases.
  • NOTE: Spam and/or promotional messages and links within a comment will be removed
  • Avoid profanity, slander or personal attacks directed at an author or another user.
  • Don’t Monopolize the Conversation. We appreciate passion and conviction, but we also believe strongly in giving everyone a chance to air their thoughts. Therefore, in addition to civil interaction, we expect commenters to offer their opinions succinctly and thoughtfully, but not so repeatedly that others are annoyed or offended. If we receive complaints about individuals who take over a thread or forum, we reserve the right to ban them from the site, without recourse.
  • Only English comments will be allowed.

Perpetrators of spam or abuse will be deleted from the site and prohibited from future registration at’s discretion.

Write your thoughts here
Are you sure you want to delete this chart?
Post also to:
Replace the attached chart with a new chart ?
Your ability to comment is currently suspended due to negative user reports. Your status will be reviewed by our moderators.
Please wait a minute before you try to comment again.
Thanks for your comment. Please note that all comments are pending until approved by our moderators. It may therefore take some time before it appears on our website.
Are you sure you want to delete this chart?
Replace the attached chart with a new chart ?
Your ability to comment is currently suspended due to negative user reports. Your status will be reviewed by our moderators.
Please wait a minute before you try to comment again.
Add Chart to Comment
Confirm Block

Are you sure you want to block %USER_NAME%?

By doing so, you and %USER_NAME% will not be able to see any of each other's's posts.

%USER_NAME% was successfully added to your Block List

Since you’ve just unblocked this person, you must wait 48 hours before renewing the block.

Report this comment

I feel that this comment is:

Comment flagged

Thank You!

Your report has been sent to our moderators for review
Disclaimer: Fusion Media would like to remind you that the data contained in this website is not necessarily real-time nor accurate. All CFDs (stocks, indexes, futures) and Forex prices are not provided by exchanges but rather by market makers, and so prices may not be accurate and may differ from the actual market price, meaning prices are indicative and not appropriate for trading purposes. Therefore Fusion Media doesn`t bear any responsibility for any trading losses you might incur as a result of using this data.

Fusion Media or anyone involved with Fusion Media will not accept any liability for loss or damage as a result of reliance on the information including data, quotes, charts and buy/sell signals contained within this website. Please be fully informed regarding the risks and costs associated with trading the financial markets, it is one of the riskiest investment forms possible.
Continue with Google
Sign up with Email