Fupeng's Trading Methodology: Why is Volatility in Macro Asset Trading So Important? [Fupeng Talks 17]

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Trading Methodology: Why Is Volatility So Important in Trading Major Asset Classes?

From the trading desk, Fupeng comments on finance. This episode was recorded on January 30, 2026. Today, we discuss a critically important topic—volatility. Long-term followers should know by now: Volatility has always been a central focus in my investment analysis across various fields. The reason I emphasize this metric is that I’ve found most ordinary investors lack a clear understanding of the intrinsic connection between volatility and their own investment strategies. Specifically, investors of different risk appetites show significant differences in their attitudes toward volatility. Investors with ultra-high risk preference—those chasing high returns and willing to “risk small for big gains”—tend to favor high-volatility environments, as the uncertainty generates excitement for them. By contrast, for those with lower or average risk appetite, high volatility is not ideal, and should be avoided due to the potential risks it implies. Previously, I have referenced volatility often in my analysis of U.S. stocks and various investment strategies, but most investors only focus on the return rate, ignoring the core logic of the investment market—risk and return always coexist. This same logic applies to the relationship between volatility and returns: high volatility implies potentially high returns, but high returns always come with high risk. To be clear: High volatility signals greater uncertainty, while low volatility indicates relative certainty. Note that high or low volatility does not directly correlate with market ups or downs; high volatility may occur whether the market is rising or falling. From a portfolio optimization perspective, the optimal investment portfolio achieves a combination of stable growth and declining volatility—a good example in stocks is when investors prefer steadily rising prices paired with decreasing volatility. In the 2022 U.S. stock market, NVIDIA’s performance after its valuation correction was a prime case: After interest rate hikes led to valuation adjustments, volatility was high, then gradually fell; in the run-up to its earnings breakthrough, the stock maintained both stable growth and low volatility—which is the favored state for professional institutions, large funds, and management teams. The core advantage of such a portfolio is that although long-term returns might not be extraordinarily high, the certainty brought by low volatility allows investors to confidently add leverage and magnify actual gains; likewise, in market declines, low volatility reduces uncertainty in losses and improves the investment experience. For professional investors and major funds, avoiding high volatility is one of their key operating principles. When market volatility is extremely high, it often coincides with sensational news hype and mass entry by ordinary, non-professional investors. The core reason is that professional investors proactively avoid the uncertainty of high volatility—they refuse to blindly participate in high-risk trades. This can be likened to casino logic: If volatility is outside a reasonable range, whether investors “chase up,” “chase down,” “bottom-fish,” or “top-pick,” it’s essentially a high-risk behavior, not a rational choice. Most ordinary investors are driven by desire, focusing solely on potential returns and ignoring the balance between risk and return—hence why “mass entry by ordinary investors is rarely good news,” since such investors rarely assess whether the risk they take matches the return they seek. Importantly, low volatility is not a guaranteed positive—everything has two sides. Investors prefer volatility within a reasonable range: It allows for breakthrough opportunities in low volatility environments (where volatility may expand appropriately), but one must also be cautious of the risks when volatility is too low. Persistently low volatility suggests high certainty in the market, which can tempt investors to take on leverage; the higher the leverage, the more vulnerable the market is to large volatility increases from even small fluctuations, introducing risk. The central criteria for measuring volatility depends on the context: When volatility is too low, the main focus is on market leverage levels—if there are investments with 90% win rates and low volatility, it’s generally rational for investors to leverage them heavily, but beware of the risks of over-leverage. For excessive volatility, the key measurement is market liquidity: Extreme volatility means high uncertainty, causing professionals to withdraw and leading to tightened liquidity or even liquidity crunches. This highlights the critical importance of volatility. In twenty years of investing, I have always made volatility the core metric of analysis—my long-term readers should know this well. Currently, market volatility is at extremely exaggerated levels, and all the phenomena above can be observed. Instead of mere risk warnings, I prefer to offer methodological analysis so that everyone understands the importance of volatility. Future investment judgments and choices must depend on your own insight and reflection.Risk Warning & DisclaimerMarkets carry risk; please invest with caution. This article does not constitute personal investment advice, nor does it take into account individual users’ specific investment objectives, financial conditions, or needs. Users should consider whether the opinions or conclusions mentioned herein are suitable to their own conditions. Any investment based on this article is at your own risk.