Having been an active participant in financial markets for about a decade, I can say that volatility is quite high. This is one of the reasons why only selected individuals choose to engage in active trading business, let alone try a career in it.
The volatility of Forex and the volatility of futures and equities can make living in the markets a monumental task. However, this is manageable and may even benefit you.
What is volatility trading?
Sometimes markets are silent for several occasions or days. This can give the impression that it is easy to trade forex – but you can move hundreds of pip in a few hours! In order to navigate the periodic chaos of forex trading, it is important to understand the differences in forex volatility.
Volatility trading needs to be addressed in two ways: historical and tacit. Historical volatility is the usual price movement over a period of time (i.e., one month or one year). In contrast, implicit volatility is any abnormal current or future exchange rate. Compared to historical pricing, the implicit tends to exceed the historical range. So in this article we are referring to implied volatility.
Forex volatility can be dangerous, but nice gains are possible if you play your cards well.
Forex Volatility Trading Checklist for FX Leaders
We can overcome market volatility. In fact, we can even turn it to our advantage and take advantage of some great moves. During the years I was a trader, I worked out some rules to avoid lags and take advantage of volatility trading. So, here we go:
Expand your goals
The most logical thing to do when the market is up and running is to broaden your profit / stop loss targets. Volatile markets and subsequent pricing show three basic types of behavior:
- The shaky market can run in one direction with hundreds of toilets without looking back
- You may run for hundreds of pipettes in a wavy trench operation and make deep feedback after every foot
- It may move up and down quickly within a specified range
In all types of volatile markets, it’s better to increase your stop loss and pick up profit targets if you want to survive. This way you can avoid the negative effects of chip sawing and minimize your losses while increasing your profit potential.
Broadening your goals will help you avoid flogging.
Minimize losses
Sometimes, when volatility is high and pricing is volatile, it is wise to use small stops and high profit profit targets. This volatility trading technique usually gives the best results when applied in the market. It seems contradictory with the above technique, which discusses broadening the goals – but it actually works!
Once the price has determined the range and is trading within it, the stop should be placed close above the top when you sell and below the bottom when you buy. You never know when the price will break out of range and how long it will run when that happens. So on these occasions, it is better to have a strict stop loss.
Remember when EUR / USD traded between 1.05 and 1.1050 after the Fed meeting in March? He moved 400-500 pipes up and down during a few sessions. When he finally knocked the top of the range, the price jumped to 1.1450. If you put the stop above 100, 200 or even 300 cores above the peak, you suffered a big loss after the eruption – this often happens in volatile markets. Even if they stop a few times, you can more than compensate for the losses with a winning trade.
Reduce leverage
Leverage is very useful for traders who want to make a big profit with a limited amount of equity. Leverage, however, is also a major killer of trading accounts. So, if you broaden your stop loss target using a volatility trading plan, it’s better to also reduce leverage. At the end of the day, your account risk should remain in the same proportion as you normally would.
A few weeks ago, when the Chinese stock market crashed, the movement of some forex pairs in a few hours was as high as 600 pips. We decided to enter a long USD / JPY value after the first 200 cores decreased. We opened a buy trade with 300 pips targets for both profit and stop loss. Few knew the pair was moving down another 400 pipes.
If we had used the same 3% leverage for a 30 pip stop loss, we would have lost 30% of our account in one trade. But we reduced leverage from 1:10 to 1: 2 and lost 2% of the bill.
We got it back later that day when the price went up with another purchase, as you could see from our indications. If we had kept leverage at the same level and lost 30% of our account, we would have been hit hard. It is very likely that we could not have opened a second position to recoup our loss on the first trade.
It is not possible to beat the whole market, so it is better to reduce leverage under low volatility.
Diversify your portfolio
Portfolio diversification is one of the main methods for long-term survival. Large institutions always diversify their portfolios by many means, in many different markets.
Diversification is of particular importance when volatility is high. You can never be 100% sure of the outcome of trading under normal trading conditions. During periods of high volatility, uncertainty increases. So splitting funds that are usually traded into several pairs and in different directions limits the risk and often brings in nice profits.
Diversification becomes even more profitable when the price fluctuates amid increasing forex volatility. If you sell EUR / USD with resistance and buy AUD / USD with close support when the wave of USD strength ends, you can make two winning trades. In the worst case, it only covers loss-making transactions and eliminates its losses. If you do this with multiple pairs, some will make a profit while others will pay off.
Look at the bigger picture
A shaky and undulating market often gives the impression that it is moving without a clear direction and is confused. Therefore, it is better to look at the bigger picture to avoid the effect of the noise of smaller time frames. This way, you can see the more important levels of support and resistance in higher time frames, which prevents you from overriding smaller time frame indicators.
Overselling, especially in a volatile market, is as bad as high leverage. If you open too many professions, you cannot concentrate and nurture the professions properly. The logic is blurred and it is difficult to get a clear direction. Therefore, it is best to observe the market on a larger time frame chart to select the best entry points.
How many times have we heard the phrase “patience virtue”? Patience is essential in volatility trading. So select the more important levels in the higher time frame charts, then wait until the price reaches that level and hit. When you have made enough profit in your trade, go out. Rinse and repeat.
More Tips for Trading in Volatile Markets: How to Trade Profitably in Volatile Markets – Forex Trading Strategies
When in doubt, stay out!
Last but not least, practice avoidance if it is appropriate. You don’t always have to be in the market. You cannot grab every single tick that the price moves up and down. You trade for profit, so it’s ideal to wait for the best opportunities.
If you’re not sure which direction the market is heading, it’s best to stay away and simply watch the market until a good opportunity emerges. There will always be one – don’t go chasing the price in a volatile market!