What are pros and cons of volatility trading over directional stock trading
Can't totally agree with that. Volatility trading is just one trading type of many. In my opinion it doesn't depend on whether you are a professional trader or not.  As you might have heard, retail traders are said to create 'noise' on the market, mainly due to the fact that they aren't professional in their majority. So, I would assume, if an average retail trader decided to trade volatility he would create as much noise as if would have been betting on stock directions. Basically, most types of trading would require a considerable amount of effort spent on fundamental analysis of the underlying be it volatility or directional trading. Arbitrage trading would be an exception here, I guess. However, volatility trading relies more on trader's subjective expectations about future deviations, whereas trading stock directions requires deeper research of the underlying. Is it a drawback or an advantage? I.d.k. On the other hand-side volatility trading strategies cover both upward and downward movements, but you can set similar hedging strategies when going short or long on stocks, isn't it? To summarise, I think it is a matter of preference. Imagine yourself going long on S&P500 since 2009. Do you think there are many volatility traders who have outperformed that?
If you have your long positions established and are investing responsibly (assuming you know the risks and can accept them), the next step IMO is typically learning hedging - using options or option strategies to solidify positions. Collars (zero cost) and put options are a good place to start your education and they can be put to use to both speculate (what you are effectively doing with short-position trading) or long-term oriented edging. Day trading equites can be lucrative but it is a difficult game to play - learning options (while more complex on speculation) can provide opportunities to solidify positions. Options trading is difficult grounds. I just think the payoff long term to knowing options is much greater than day-trading tactics (because of versatility) Yes, from the point-of-view to the end speculator/investor in stocks, it is ludicrous to take on liabilities when you don't have to.  That's why single-stock options are far more liquid than single-stock futures. However, if you are a farmer with a huge mortgage depending upon the chaos of agricultural markets which are extremely volatile, a different structure might appeal to you.  You could long your inputs while shorting your outputs, locking in a profit.  That profit is probably lower than what one could expect over the long run without hedging, but it will surely be less volatile. Here's where the advantage of futures come in for that kind of structure: the margin on the longs and shorts can offset each other, forcing the farmer to have to put up much less of one's own money to hedge.  With options, this is not the case. Also, the gross margin between the inputs rarely fluctuate to an unmanageable degree, so if your shorts rise faster than your longs, you'll only have to post margin in the amount of the change in the net of the longs and shorts. This is why while options on commodities exist to satisfy speculators, futures are the most liquid. First, accept the fact that you are not going to be able to predict the ups and downs of the market well enough for that to be a viable strategy. In the long run these schemes tend to be losers because it forces you to guess correctly twice (When to get out, when to get back in) and missing either date can cost you. A better strategy to benefit from market volatility: Not directly an answer to your question, but somewhat related: There are derivatives (whose English name I sadly don't know) that allow to profit from breaking through an upper or alternatively a lower barrier. If the trade range does not hit either barrier you lose. This kind of derivative is useful if you expect a strong movement in either direction, which typically occurs at high volume. I'm not sure if they're less risky. Maybe I'm being naive, but I feel they're less manipulated.   I wouldn't say I have any hard resources other than dicking around on cmegroup,com. I pay a ton for my daily newsletters so I can't just start forwarding those.   I tend to stay away from strategy books, but Mark Fisher's The Logical Trader is decent. Futures I feel are more of an experience than strategy trade. Especially the spreads. This is where systems come to die. "I interned for about six months at a firm that employed a few technical analysts, so I'll try to provide what little information I can. Since the bulk of the intra-day trading was decided algorithmically, technical analysts had two main functions: This basically boils down to my answer to your question. There are still enough people, trading firms, etc. who believe in candlestick charting and other visually subjective patterns that if you notice a trend, pattern, etc. before the majority of traders observing, you may be able to time the market successfully and profit. This is becoming increasingly dangerous, however, because of the steps I outlined above. Over time, the charting patterns that have been proven effective (often in many firms individually since the algorithms are all proprietary) are incorporated into computer algorithms, so the ""traders"" you're competing with to see the pattern are increasingly low-latency computer clusters less than a few blocks from the exchange. Summary: Candlestick charting, along with other forms of subjective technical analysis, has its believers, and assuming enough of these believers trade the standard strategies based on the standard patterns, one could conceivably time the market with enough skill to anticipate these traders acting on the pattern and therefore profit. However, the marginal benefits of doing so are decreasing rapidly as computers take over more trading responsibility.  Caveats:  I know you're in Australia, where the market penetration of HF/algo traders isn't as high as in the US, so it might be a few more years before the marginal benefits cease to be profitable; that being said, if various forms of technical analysis proved wildly profitable in Australia, above and beyond profits available in other markets, rest assured that large American or British trading firms would already have moved in.  My experience is limited to one trading firm, so I certainly can't speak for the industry as a whole. I know I didn't address candlestick charts specifically, but since they're only one piece of visual technical analysis, I tried to address the issue as a whole.  This somewhat ties into the debate between fundamental or technical analysis, which I won't get into. Investopedia has a short article on the subject. As I said, I won't get into this because while it's a nice debate for small traders, at large trading firms, they don't care; they want to make profit, and any strategy that can be vetted, whether it's fundamental, technical, or astrological, will be vetted.  I want to add more information to my answer to clear up some of the misconceptions in the comments, including those talking about biased studies and a lack of evidence for or against technical analysis (and candlestick charts; I'll explore this relationship further down).  It's important to keep in mind that charting methods, including candlestick charts, are visually subjective ways of representing data, and that any interpretations drawn from such charts should, ideally, represent objective technical indicators. A charting method is only as good as the indicators it's used to represent. Therefore, an analysis of the underlying indicators provides a suitable analysis for the visual medium in which they're presented.  One important study that evaluates several of these indicators is Foundations of Technical Analysis: Computational Algorithms, Statistical Inference, and Empirical Implementation by Lo, Mamaysky, and Wang. Lest anyone accuse its authors of bias, I should point out that not only is it published by the National Bureau of Economic Research (a highly reputable organization within economics and finance), but also that the majority of its authors come from MIT's Sloan school, which holds a reputation second to none. This study finds that several technical indicators, e.g. head-and-shoulder, double-bottom, and various rectangle techniques, do provide marginal value. They also find that although  human judgment is still superior to most computational algorithms in the area of visual pattern recognition, ... technical analysis can be improved by using automated algorithms Since this paper was published in 2000, computing power and statistical analysis have gained significant ground against human ability to identify and exploit for visual pattern detection like candlestick charts.  Second, I suggest you look into David Aaronson's book, Evidence-Based Technical Analysis: Applying the Scientific Method and Statistical Inference to Trading Signals. He finds similar results to the Lo, et. al. paper, in that some technical indicators do add value to the investment process, but those that do are those that can be represented mathematically and thus programmed directly into trading algorithms (thus bypassing visual tools like candlestick charts).  He describes how studies, including Lo, et al., have found that head and shoulders patterns are worse than random, i.e. you would earn higher returns if you simply traded at random. That point is worth than repeating. If a day-trader is using a candlestick chart and using head-and-shoulders patterns as part of their toolkit, he's rolling the dice when he uses that pattern and returns that come from its application come from chance. This reminds me of that old story about a company that sends out pamphlets predicting the results of sports games, complete with ""strategies"" and ""data"" to back up the predictions. The company sends out several versions of the pamphlet every game, each predicting a different winner. Given a large enough sample size, by the end of the season, there are a few people who have received a pamphlet that accurately predicted the winner for every game and they're convinced the system is perfect. The others weren't so lucky, however. Relying on candlestick charts and TA patterns that are relics from the pre-computerized era is reassuring to some traders and gives them a sense of control and ""beating the market,"" but how long will chance remain on your side? This is why I maintain that visual tools like candlestick charts are a slowly dying medium. They certainly still add value to some trading firms, which is why Bloomberg terminals still ship with this functionality built in, but as more and more research shows, automated algorithms and statistical indicators can provide more value. It's also important to think about whether the majority of the value added by visual tools like candlestick charts comes in the form of profit or a sense of security to traders who learned the field using them over the past few decades.  Finally, it's extremely important to realize that the actions of retail investors in the equities market cannot begin to represent the behaviors of the market as a whole. In the equities markets alone, trading firms and institutional investors dwarf retail investors, and the difference in scale is even more vastly pronounced in derivatives and currency markets. The fact that some retail investors use candlestick charts and the technical indicators they (hope) underlie them provides nothing but minor anecdotal evidence as to their effectiveness." When volatility is higher, the option is more likely to end up in-the-money. Moreover, when it ends up in-the-money, it is likely to be over the strike price by a greater amount. Consider a call option. With high volatility, moves in the stock price are big - both up moves and down moves. If the stock moves up by a lot, the call option holder will benefit greatly. On the other hand, when the stock moves down, below a certain point the option holder does not care how big a down move the stock has. His downside is limited. Hence, the value of the option is increased by high volatility. I know everyone who searches this is looking for this answer. Bump so people are able to get this concept instead of looking all over the web for it. It's a lot easier to trade a contract based on the forward value (a futures contract) of some commodity, than say constantly trade &amp; deliver 1000 barrels of crude oil.   Along those lines, it's also easier to trade an option on the forward value than it is an option on the actual commodity, especially if you have the ability to exercise the option I use over half my buying power of my portfolio for options, and I'm not a fan of any of the strategies listed above either (I stay away from negative theta trades for the most part), but I just listed them to point out that saying the reason someone wouldn't enter a short position is for fear of infinite losses is asinine. It's easy enough to make any trade risk defined if that is something the trader cares about. Obviously there are good answers about the alternatives to the stock market in the referenced question.  HFT has been debated heavily over the past couple of years, and the Flash crash of May 6, 2010, has spurred regulators to rein in heavy automated trading. HFT takes advantage of churn and split second reactions to changing market trends, news and rumors. It is not wise for individual investors to fight the big boys in these games and you will likely lose money in day trading as a result. HFT's defender's may be right when they claim that it makes the market more liquid for you to get the listed price for a security, but the article points out that their actions more closely resemble the currently illegal practice of front-running than a negotiated trade where both parties feel that they've received a fair value. There are many factors including supply and demand which affect stock prices more than volume does. While market makers are generating the majority of volume with their HFT practices, volume is merely the number of shares bought and sold in a day. Volume shows how many shares people are interested in trading, not the actual underlying value of the security and its long term prospects. Extra volume doesn't affect most long term investments, so your long term investments aren't in any extra danger due to HFT. That said, the stock market is a risky place  whether panicked people or poorly written programs are trading out of control. Most people are better off investing rather than merely trading. Long term investors don't need to get the absolute lowest price or the highest sell. They move into and out of positions based on overall value and long term prospects. They're diversified so bad apples like Enron, etc. won't destroy their portfolio. Investors long term view allows them to ignore the effects of churn, while working like the tortoise to win the race while the hare eventually gets swallowed by a bad bet. There are a lot of worrying and stressful uncertainties in the global economy. If it's a question of wisdom, focus on sound investments and work politically (as a citizen and shareholder) to fix problems you see in the system. Stock markets are supposed to be about investment and providing capital to companies for operations and research.  High frequency trading is only about gaming the market and nothing else.  Arguments that this provides more capital or liquidity don't make any sense because the speed of trading is such that listed companies cannot take advantage and only high frequency traders are served. How I understand it is: supply/demand affect price of stock   negatively/positively, respectively. Correct. Volume is the amount of buying/selling activity in these stocks (more   volume = more fluctuation, right?). Sort of.  Higher volume means higher liquidity.  That is, a stock that is traded more is easier to trade.  It doesn't necessarily mean more fluctuation and in the real world, it often means that these are well-understood stocks with a high amount of analyst coverage.  This tends towards these stocks not being as volatile as smaller stocks with less liquidity. Company revenue (and profit) will help an investor predict company   growth. That is one factor in a stock price.  There are certain stocks that you would buy without them making a profit because their future revenue looks potentially explosive.  However, these stocks are very risky and are bubble-prone. If you're starting out in the share market, it's generally a good idea to invest in index funds (I am not a broker, my advice should not be taken as financial advice).  These funds aggregate risk by holding a lot of different companies.  Also, statistics have shown that over time, buying and holding index funds long term tends to dramatically outperform other investment strategies, particularly for people with low amounts of capital. If you are in it for the long run and are not worried about intra day fluctuations and buying within + or - 1% you would be better off going for a market order as this will make sure you buy it on the day.  If you use limit orders you risk missing out on the order if prices gap and start rising in the morning. Another option is to employ stop buy trigger orders (if offered by your broker). So you would have to sum up and decide which type of order would suit your strategy the best. Are you looking to buy the security because you are looking for long term growth and gains, or are you after getting the best price possible to help your short term gains? What is essential is that company you are selling is transparent enough. Because it will provide additional liquidity to market. When I decide to sell, I drop all volume once at a time. Liquidation price will be somewhat worse then usual. But being out of position will save you nerves for future thinking where to step in again. Cold head is best you can afford in such scenario. In very large crashes, there could be large liquidity holes. But if you are on upper side of sigmoid, you will be profiting from selling before that holes appear. Problem is, nobody could predict if market is on upper-fall, mid-fall or down-fall at any time. Robert is right saying that options' prices are affected by implied volatility but is wrong saying that you have to look at the VIX index. For two reasons:  1) the VIX index is for S&P500 options only. If you are trading other options, it is less useful. 2) if you are trading an option that is not at the money, your implied volatility may be very different (and follow a different dynamics) that the VIX index.  So please look at the right implied volatility.  In terms of strategy, I don't think that not doing anything is a good strategy. I accept any point of view but you should consider that option traders should be able to adjust positions depending on market view.  So you are long 1 call, suppose strike 10. Suppose the underlying price at the time of entry was 10 (so the call was at the money). Now it's 9.  1) you still have a bullish view: buy 1 call strike 9 and sell 2 calls strike 10. This way you have a bull call spread with much higher probability of leading to profit. You are limiting your profit potential but you are also reducing the costs and managing the greeks in a proper way (and in line with your expectations).  2) you become bearish: you can sell 1 call strike 9. This way you end up with a bear call spread. Again, you are limiting your profit potential but you are also reducing the costs and managing the greeks in a proper way (and in line with your expectations). 3) you become neutral: buy 1 call strike 8 and sell 2 calls strike 9. This way you end up with a call butterfly. You are almost delta neutral and you can wait until your view becomes clear enough to become directional. At that point you can modify the butterfly to make it directional.  These are just some opportunities you have. There is no reason for you to wait. Options are eroding contracts and you must be fast and adjust the position before time starts eroding your capital at risk.  It's true that buying a call doesn't make you loose more than the premium you paid, but it's better to reduce this premium further with some adjustment. Isn't it?  Hope that helps. :)