Essential Tips for Trading Volatile Markets

In volatile markets, fortune favors the prepared—those with a well-defined approach to both risk and opportunity 

• Market volatility has surged in 2025, driven by uncertainty about presidential policy, geopolitical tension and heightened risk of recession.
• Volatility creates risk and opportunity in the markets, making a disciplined approach essential to managing risk while capitalizing on potential rewards. 
• Investors can thrive amid turbulent markets by hedging, reducing position size, and using stop-loss and take-profit orders. 

Volatility in the financial markets has been relatively subdued over the last couple of years—the bull market of 2023 and 2024 helped keep volatility in check. However, in 2025, the landscape has shifted. The onset of uncertainty because of Trump administration policies has reignited Wall Street's collective anxiety, bringing the Cboe volatility index (VIX) back into the spotlight.

The VIX hasn’t closed above 40 since spring 2020, and it’s unlikely to surpass that psychologically-charged ceiling in the near term, but market volatility has risen above its historical average. For now, the “fear gauge”—as the VIX is sometimes called—looks likely to continue oscillating in the 20 to 30 range as markets digest shifting policy pronouncements in the United States, continuing conflict in Europe and the Middle East, and headwinds in the global economy. 

Against this backdrop, many investors and traders are re-evaluating their approach. They want to defend against increased volatility, while also staying vigilant for emerging opportunities.

For long-term investors, this adjustment might be relatively minor. It’s a tried-and-true approach hinging on patience an discipline, recognizing that even in volatile times, strong fundamentals usually win out over the long-term. 

On the flip side, the current bout of volatility may present compelling opportunities for active investors. When the VIX rises, it usually signals stocks are making higher-magnitude moves. That can open the door to attractive opportunities—assuming traders are ready to navigate the increased risk that comes with them. 

At the heart of it all is a timeless balancing act: Risk vs. reward. As volatility ticks up, so does the potential for both. The key therefore lies in understanding how to manage that balance when market swings become more pronounced. Today, we’ll offer some tips for trading volatile markets—whether you're in it for the long haul or actively riding the daily waves.

Managing potential opportunities

In the whirlwind of volatile markets, opportunities to capitalize on price movements can appear out of nowhere—but only for those who are prepared. The key? A disciplined approach to setting orders. Think of them as your proactive strategy, locking in potential gains or protecting against losses. By setting orders for entry, exit or stop-loss at strategic levels, you’re ready for whatever the market throws at you. When prices hit your target, your position is automatically executed—like having a playbook deployed before the market even moves, so when volatility strikes, you’re already positioned to act.

At the top of the list are limit buy orders, which can be invaluable for entering or adding to positions during intraday market dips. Setting these orders at levels that reflect a stock’s intrinsic value enables you to capture potential opportunities when the market overreacts. In times of volatility, these dips can offer a chance to buy quality stocks at attractive prices. And if you want to keep these orders in place over a longer period, it’s essential to mark them as Good-Til-Cancel (GTC). GTC orders stay active until they are executed or manually canceled, ensuring you don’t have to monitor the market constantly, while still being positioned for favorable movements.

If you don’t specify GTC, your limit order may expire at the close of the trading day (depending on your platform’s default settings). To take advantage of longer-term corrections or emerging opportunities, setting orders as GTC ensures they stay alive beyond a single trading session, providing more flexibility in volatile conditions. And to complement these GTC buy orders, stop-loss orders are another critical tool for managing downside risk. 

In volatile markets, where unexpected reversals can occur at any moment, stop-loss orders act as a crucial safeguard. These orders automatically sell your position if the price drops to a specified level, protecting you from larger losses. By setting a stop-loss order at a price below your original entry point, you limit your potential loss in case the market moves against you, enabling you to exit a position before your losses become too significant. This helps prevent emotional decision-making, ensuring that your strategy remains intact even when the market turns unexpectedly.

A stop-loss limit order adds an additional layer of control. It enables you to specify a trigger price that will activate the stop order. However, unlike a standard stop-loss order, a stop-loss limit order will execute only at the specified price or better. That means you avoid selling during rapid market movements at a price that’s too low. The trade-off is the order might not be executed at all if the price moves too quickly past your limit, potentially leaving you with an unexecuted order if the market price doesn’t reach your set limit.

Take-profit orders (also known as limit closing orders) enable you to lock in profits when the market moves in your favor. By setting these orders at predetermined levels, you reduce the risk of missing out on gains during a sharp rally. When the price reaches your target, the order automatically triggers, selling your position and securing your profits before the market potentially reverses. By incorporating a mix of limit buy orders, stop-loss orders and take-profit orders, you create a well-rounded execution strategy. This balanced approach helps you remain disciplined in volatile markets, enabing you to capture upside potential while effectively managing downside risk.

Staying informed about developments in the news is also essential when managing risk in volatile times. Whether it’s a sudden geopolitical shift or unexpected earnings results, keeping up with the latest news helps you adjust your approach (and orders) quickly, responding to new opportunities, or mitigating potential risk before it can affect your portfolio.

Managing potential risk

Effective risk management is a cornerstone of successful trading and investing, but it becomes even more critical when market volatility spikes. During these periods, the potential for both gains and losses grows exponentially. This makes it essential to stay vigilant, adjusting your approach as conditions change.

The first step in managing risk is to analyze your portfolio to identify any outsized or undesired risk. Increased volatility often exposes areas of overexposure—whether that’s an over-concentration in certain stocks, sectors or asset classes. A review also presents an opportunity to reassess other positions. 

Should you lock in profits by closing out winning trades to free up capital for emerging opportunities? Whether to trim or hold winning positions depends on your outlook and strategy, but in volatile times capturing profits can often be a prudent choice. The capital from closing a winning position (or closing part of it) can be used if new opportunities are identified amid spiking volatility. On the other hand, this portfolio analysis may also reveal that recent pullbacks in existing positions present a good opportunity to add to those positions, particularly if the long-term fundamentals remain strong.

When it comes to volatile markets, one of the most effective approaches to risk management is to reduce your position size. By trading smaller positions, you limit your exposure to unfavorable movement in a single underlying, theoretically enabling you to weather larger market swings without risking outsized losses. This principle applies both to long-term investors and day traders alike. That’s why dollar-cost averaging is particularly valuable in volatile markets—it helps smooth out the effect of market fluctuations and mitigates the risk of making a large bet at the wrong time.

Another strategy to consider is hedging. It provides a way to protect your portfolio against potential downside risk, especially in a market prone to sharp, unexpected movement. Under a hedging strategy, instruments such as options or inverse exchange-traded funds can be used to help offset losses in your core holdings. When volatility is high, a well-structured hedging strategy offers peace of mind and can help protect capital. 

Finally, when volatility picks up, monitoring your portfolio becomes more critical than ever. Actively tracking your positions gives you the flexibility to make adjustments quickly when market conditions change. Whether you're capitalizing on short-term price movements or managing long-term investments, staying tuned into market shifts enables you to act decisively when market conditions warrant. 

Takeaways

In volatile markets, managing risk and seizing opportunities requires a disciplined approach. By carefully setting orders, adjusting position sizes and staying informed, investors and traders can navigate heightened volatility with confidence. 

While current market conditions may suggest elevated volatility for the near term, keep in mind that volatility is never static. A critical development, which could help cool the market's nerves, might be a sudden shift, such as the announcement of a ceasefire in the Russo-Ukrainian war. A critical development like this could provide a temporary reprieve from market uncertainty, likely pushing the VIX back below 20. 

Even though such a shift may be short-lived, this example highlights the unpredictable nature of the markets in early 2025. For now, staying agile and adaptable is essential. Whether volatility remains high or temporarily drops, the principles of disciplined order setting, position sizing and vigilant monitoring will help you stay ahead of the curve and make the most of whatever the market brings.

Andrew Prochnow, Luckbox analyst-at-large, has more than 15 years of experience trading the global financial markets, including 10 years as a professional options trader.