Higher volatility leads many traders to seeing an increase in trading opportunities. The massive market swings bring thoughts of monumental upside, but in addition for potential loss especially if traders try not to make the necessary precautions. During times of volatility, traders want to adjust their strategy to compensate for erratic market. When trading over these market conditions, traders should stick to the rules below.
1. Be More Picky Before Putting Trades
Planning to take advantageous asset of most of the trading opportunities that present themselves in volatile markets, traders are tempted to place an increase number of trades. This temptation should always be avoided. It’s important to remember that in volatile times, losses are usually huge. Before placing a trading, examine risk tolerance levels. Determine the degree of risk this is certainly acceptable for the trader both on an emotional level and financially before placing any trades.
2. Use Less Leverage
During high market volatility, losses can be disturbing. With all the average trading range increased in volatile times traders should always be considering how leverage will affect trades. At a single percent and sometimes even a half percent margin, investors must certanly be mindful of simply how much leverage and even the size position being traded make a difference their portfolio. In normal market conditions, placing a 2 lot position is fine while you are looking to make about 50-100 pips. During a far more volatile time, once the potential loss is 100-200 pips, it stops being a successful risk to reward ratio. To compensate traders should look to taking on smaller trading positions, in this instance only one lot instead of the average 2 lot position.
3. Trade with More Discipline
Traders must always follow their predetermined trading strategy regardless of market condition. During volatile markets, this is even more important to make use of that same level of restraint. Traders must stick to any set stops, contingency plans or risk management benchmarks without hesitation. This can make it possible to define just how much risk is taken should price action be uncontrollable. Without this degree of discipline and self control losses can be great.
4. Tighten Stops
Many traders are reluctant to use tighter stops in volatile markets since they see the large swings enhancing the likelihood that the positioning is likely to be taken out. Having tighter stops also can provide great risk managers in times during the extreme volatility. For instance, on a EURUSD trade, as opposed to setting an 80 pip stop to safeguard your position, consider placing a 50-60 pip stop. This will insure the protection of one’s currency position and in case the stop is broken, there is a higher likelihood that the trend will stay lower together with stop took you out before you could potentially lose more cash.
The width of this stop being set does be determined by the currency pair being trading as some pairs have wider ranges. In a Yen cross just like the GBPJPY or AUDJPY, traders may be more likely to have wider stops as his or her average daily range is 50% more than that of the EUR/USD. With that in mind, stops during volatile market conditions must not as wide as before. As opposed to an end 100 pips below entry, traders may consider a 25 pip reduction and now have a 75 pip stop. Below is a chart showing the EURUSD as well as the GBPJPY on a single very volatile day when you look at the foreign exchange. The EURUSD had an impressive array of nearly 600 pips! The GBPJPY far dominated though with nearly a 2000 pip trading range.
5. Be Prepared
It can also help a trader to understand what is inducing the current spate of volatility in the markets in order to be prepared when it comes to unexpected. As such, an investor can accommodate their technique to the market environment and not only the currency pair being traded. The very first among these considerations is accounting for emotions in an industry: is fear currently driving the marketplace lower? Or perhaps is it buyer’s mania this is certainly keeping the bullish tone alive? Traders’ overreaction and emotion have a tendency to push markets to overextended targets. This particular fact alone creates volatility through simple supply and demand.
Volatility also can, and more than likely will, be sparked by economic events. In cases like this, market participants may interpret fundamental data differently and not as cut and dry as the more novice trader. An amazing exemplory case of this is monthly manufacturing reports that are released in pretty much all industrial economies. The classic scenario gets the market honed in on a specific number when it comes to month. However, traders old and young will sometimes wonder why the market sold off if manufacturing showed positive growth. The clear answer is easy. The marketplace had an alternative interpretation and positions were violently reshaped and shifted. These tend to create great opportunities for a few and horrible memories for other people. Below is an hourly chart of this EUR/USD during ISM Manufacturing for October 1, 2008. Here we could look at huge price gap that occurred as a result of market volatility as well as the resulting trend.
Panic and erratic momentum can additionally be located in certain market environments. Never to be mistaken for fear or greed, panic selling and buying can create very choppy and relatively untradeable markets. These conditions will lead some to flip flop their positions while leaving others gaping at the fact that the position was right, only to be stopped out prematurely. Both of these common examples will generate further panic and volatility as traders abandon their very own individual technique for the chance of instant profits or stoppage revenge. Because of this, a vicious cycle of volatility ensues until a definitive market direction could be established.
The simple rules above, and a job to getting to learn the existing trading environment, can empower every trader through the ranks. However some relate volatility with difficult and untouchable markets, opportunities continue steadily to remain abound during these less than attractive conditions to those focused and fortunate.
By using these five simple steps, trading in volatile market conditions should really be just a little simpler. Do not forget to adjust leverage predicated on volatility, follow your trading plan, tighten your stops and know why you are receiving into a trade before you put it.