Written by Reginald Chan on June 10, 2021

What Does It Mean When The Market Is Choppy And Why You Should Avoid It?

The stock market is a market for publicly traded companies. Any company can become a part of this market because of its value. Investors buy stocks in companies to make money from their appreciation in value. This is called the capital appreciation of a stock. You can buy a stock for a price called the "exchange price in the stock market."

What Is The Stock Market?

The stock market is a collection of companies with their shares for sale, but only a minority of those companies are traded on a stock exchange. Some of them are listed on the New York Stock Exchange (NYSE), others on the London Stock Exchange (LSE), while others are only traded through private companies. Stock markets are locations where you can buy or sell a stock. They are prominent places, and it can be hard to understand. While it's easy to get caught up in the day-to-day ups and downs of the market, the real goal is to learn how the market works and why it happens the way it does. The first step in doing this is understanding what a stock is. Once you know that, you can learn about the markets' history, how they're valued, and how investors make money from them. Some of the major stock exchanges include:

  • New York Stock Exchange (NYSE).
  • NASDAQ.
  • Tokyo Stock Exchange.
  • Shanghai Stock Exchange (SSE).
  • Euronext.
  • Hong Kong Stock Exchange.
  • London Stock Exchange.
  • Shenzhen Stock Exchange.

What is a Stock?

A stock is a financial investment in a company. It can be a physical share, a certificate, or a promise to pay money. Stocks are financial investments in corporations, and an investment in a company is made up of two parts: the portion of a company's stock that you own and the portion of a company's stock owned by someone else.

Choppy Markets: What Does it Mean?

Look at any chart of the stock market, and you'll find there is not much consistency. The market will rise, then fall for a while, then rise again. Each of those movements is called a "wave" in technical terms. The waves are usually small, perhaps a few points in a primary index (the Dow Jones Industrial Average or the S&P 500 Index), so there's not much surprise when the market goes up or down. Nonetheless, investors and traders track movements in the market, and the "waves" are a sign that things are changing. Essentially a choppy market is a market that changes rapidly due to unforeseen circumstances such as:

  • Technological advances.
  • Mergers and acquisitions.
  • Changes in the workforce.
  • Currency fluctuations.
  • Regulations.

Understanding Choppy Markets

Markets are constantly moving. The prices of stocks, bonds, commodities, and real estate fluctuate wildly, seemingly out of control, but ultimately there is a method to this madness, a pattern to the madness. The market is a river. It flows, and then stops, and then flows again. The stock market is notorious for its jerky movements, which can lead to gains and losses in a matter of seconds, and the news media loves to feature stories about how volatile the market is. But while the market is unstable, it is essential to understand why that is. 

When you look at the big picture, it becomes clear that this volatility results from the market being made up of a lot of small markets, which makes it easy for large movements to appear. In other words, a choppy market is one where the market is in balance. This may not sound right after discussing how volatile it is, but "in balance" can also be a form of volatility. This could mean, for instance, that buyers and sellers are on equal footing or that sellers and buyers are in an intense fight, but there is no clear winner. Many trend traders struggle to make money in choppy markets since they focus on trading movements, up or down. Trend trading capitalizes on the progress of sustained price in one direction.

How to Identify a Choppy Market

Some people believe that the market will be choppy when it moves up and down for 2-3 consecutive days. Others say that the market will be choppy when it moves up and down three times in a single week. Still, others believe that the market will be choppy when it moves up and down at least four times in a month. Nevertheless, there are some methods you can use to identify when a choppy market could be approaching:

  • Fibonacci retracements: These retracements provide easily observable visual indicators of trends.
  • Rectangular prices: You should look for several highs and lows in the same area to see whether there has been choppy trading recently.
  • General Market Indices: You can look at the general indicators and see how the market is performing.

Why You Should Avoid a Choppy Market

It's important to know when the market is choppy and when it is not. A choppy market can be hard to navigate, and the consequences can be devastating. You can lose control of your investments and end up with less money than you started with. A choppy market can even lead to a market crash, which can spell disaster for those who lack the experience and knowledge to navigate it. In summary, trading in choppy market conditions is like suicide. Trading is a precarious business for anyone who lacks experience and a mastery of the strategy. Even experienced traders will steer clear of such markets.

Additionally, traders are often unable to generate profits when the markets are choppy since the moves are relatively small compared to trending markets. This trading style can be worth your time, however, if you have a high winning percentage. Essentially, this means aiming for a win ratio between 60% and 70%. In addition, tight stops and tight profit targets are also required during these small moves. Whenever you are wrong, you limit your losses, while when you are right, you book your profits.

The stock market is not always a smooth ride; sometimes it dips, and sometimes it goes up, but this type of volatility is nothing new. Investors have known this for some time; the market's fluctuations are nothing more than a natural part. The market's ups and downs are no different from the natural ups and downs of the ocean. When the waves are small, you can walk along with them and feel the sea breeze. However, when the waves are large and unpredictable, it is far more challenging to navigate and stay afloat.

Article written by Reginald Chan
A meticulous entrepreneur by nature and a serial entrepreneur. Founded a few awesome startups including Marketing Lancers, WP Maven and TheMarketingHuddle.com. Reginald is a sought-after success coach, digital marketing consultant and TEDx speaker from Asia. Currently, he teaches others how to make money online for free.

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