Trading in Volatile Markets
Forex volatility is the measure of how frequently a currency’s value changes. A currency either has high volatility or low volatility depending on how much its value deviates from its average value. More volatility leads to higher Forex trading risk but also opens up more opportunities for the trades since the price moves are more significant, leading to higher profits. Volatile Forex trading comes with an element of managing risk to the best of the trader’s capability. A way to handle such dangers is to buy and sell currency pairs incrementally since that cuts down risks that come from sudden movements. This also helps traders who wish to invest with a long-term perspective. Identifying currency volatility can be a complicated task since volatility by nature is unpredictable. However, it is possible to at least get some idea about the volatility in the market through historical volatility in charts, understanding the market scenario, and being aware of the ongoing market conditions and country news. Various trading strategies can help you mitigate the risk that comes from a volatile Forex market. These allow you to make profits out of trades and also minimizes risk protecting you against any losses. In this article, we’ll discuss everything you need to know about trading in volatile markets:
1. Keep your position sizes low
Keeping your position size low enables you to protect your investments from significant losses. Especially if you wish to escape the volatile periods, it is recommended to risk no more than 5% of your total account value on open trades. This gives your position more room to move, and even in the case of worst-case scenarios, you do not lose more than you can afford.
2. Trade with respect to news and events
Being aware of the current events and news happenings is one of the most critical things while trading in the Forex market. Following current affairs alerts you against circumstances that may negatively impact the value of the currencies. Currency volatility also depends on political turbulence. Hence, following general awareness news helps you to identify potential fluctuations.
3. Use charts and indicators while trading
Various technical indicators help you anticipate market sentiment and future market conditions. It helps you predict the future price direction and studying charts and indicators enables you in formulating a solid risk management strategy. You can also choose when to trade and avoid any highly volatile forex market periods of trade through this.
4. Use stop-loss trades
Stop losses are one of the most effective ways to minimize risk while trading. Especially while trading volatile currencies, the stop loss ensures that losing any trades is accounted for beforehand. You can select a particular level of loss that you can bear in the worst-case scenario and stop your trade with that specific value. This way, even if your currency pair witnesses enormous losses during a volatile market, you are only exposed to losses that you can afford.
5. Have a solid Forex trading strategy and adhere to it
The first and foremost step while entering the Forex market is to devise a Forex trading strategy plan with everything in place, according to your trading practices and goals. Sticking to this plan is even more important as that will help you manage volatility swings. When you have a trading plan that you follow, you navigate volatile markets seamlessly and trade more consistently.
6. Maintain a trading journal
Keeping a log of all your trades and their prices is an exceptional habit to adopt. It keeps everything in an organized place and allows you to go back and check on the information about the trades you have made in the past. It is also valuable while trading in a volatile Forex market as it allows you to see your past trades and understand what has worked in your favor and what has not. This then leads to making better trade decisions that protect you against losses. A well-maintained journal ensures that you become a better trader in the future through the process of self-evaluation, reflection, improvement, and in-depth understanding of your trade behavior.
Volatility and Risk
Volatility and risk are directly proportional concepts. They are also related but have some distinct differences that a trader must understand. Volatility is something that is absolutely unpredictable and out of a trader’s control. On the other hand, the risk is entirely under the control of the trade since they can decide how much they are willing and able to risk and manage efficiently. Nevertheless, they have a strong relationship in place as trading volatile currencies always have a substantial risk involved as prices move sharply. Such huge swings magnify losses and gains. Many times, traders take a chance on a volatile market and get influenced mainly by other traders doing the same. This is known as the herd mentality. When a market crashes, traders generally sell at a lower price, incurring huge losses and not considering the fact that every falling market eventually rises in its due time. It is essential to be aware of the risks and understand the pros and cons of every trade, especially in a volatile market. Risking based on popular opinion is not a rational thing to do, and own judgment backed by facts and figures prevailing in the market is the only way to minimize risk and ensure successful trades.
By now, we have understood that trading in a volatile market is a risky business. However, through efficient strategy planning, implementing the tips that help minimize losses, and successfully devising and following a trading plan, we can place successful trades even in a volatile market. Our trading platform ensures that you get constant updates about the ongoing market events that will help you trade to the best of your abilities with proper knowledge and make considerable gains!
Average True Range
Average True Range (ATR) helps in identifying how much a currency pair price has fluctuated. This, in turn, helps traders confirm price levels at which they can enter or exit the market and place stop-loss orders according to the market volatility.
Moving Average Crossover
The Moving Average Crossover is a valuable tool to find the middle price-point of a trend in forex trading. When currency prices crossover their current moving averages, it helps traders identify the favorable buying or selling points for the currency.
What is the Bullish Engulfing Candlestick?
Bullish Engulfing Candlesticks helps in identifying an uptrend reversal in the market. This candlestick pattern stands out because a trader does not need to wait until the entire pattern is completed to enter a trade.
How To Trade The Gartley Pattern
The Gartley pattern helps identify price breakouts and signals where the currency pairs are headed. The pattern is also widely used in the forex market to determine strong support and resistance levels.
How to Trade Forex With NFP V-Shaped Reversal
A Non Farm Payroll (NFP) V-shaped reversal refers to a sudden increase or decrease in the currency pair prices right after an NFP report is released.
Candlestick Patterns: Top Candlestick Charts Every Trader Should Know
Candlestick patterns depict the price movement of assets in a graphical manner. Candlestick patterns also enable traders to predict market behaviour.
What is the Evening Star Candlestick Pattern?
Evening Star Candlestick Patterns help traders identify ideal exit levels in the forex market by signalling a slowed upward momentum and strengthened downward momentum.
How to Use Ichimoku Cloud in Forex?
The Ichimoku Cloud provides a clear market trend direction to the traders and helps them make market decisions accordingly.
Pennants Pattern: How to trade bearish and bullish pennants
Pennant Patterns work as a continuation signal in the forex market and help identify the ideal entry and exit price points
How to Trade Forex With Renko Charts
Renko Chart is a technical indicator that provides strong market trend directions by filtering out minor price movements
What are Ascending and Descending Triangle Patterns?
The Ascending and Descending Triangle Patterns confirm continued trends in the forex market.
How to Identify Cup and Handle Pattern in Forex Trading
The Cup and Handle Pattern is a technical price chart that forms the shape of a Cup and a Handle, which indicates a bullish reversal signal.
What is the Head and Shoulders pattern?
The Head and Shoulders pattern is a trend reversal indicator that predicts bullish to bearish and bearish to bullish reversals in the forex market.
What is the Hammer Candlestick Pattern?
Hammer Candlesticks enable traders to identify potential market reversal points, determine the ideal time to enter the market and place buy or sell orders accordingly.
What is The Opening Range Breakout Strategy
The Opening Range Breakout (ORB) Strategy involves taking forex positions when the currency pair prices break below or above the previous day's high or low
Morning Star Indicator
The Morning Star Indicator helps identify strong trend reversals in the forex market and enables you to take trade position entry decisions accordingly.
Stochastic Indicator is used in Forex to identify overbought and oversold market conditions that substantially lead to market reversals.
Favourite Fib Fibonacci Retracement
Fibonacci retracement strategies help traders identify the market's support and resistance levels, trend reversal points, and entry and exit decisions.
Heikin Ashi Candlestick Pattern
The Heikin Ashi Candlestick pattern is almost the same as the traditional candlesticks, with one big difference—the former is an averaged out version of the latter.
Multiple Time Frame Analysis in Forex
By monitoring different currency pairs in different time frames, you can make your Forex trades more successful and profitable.
What are Bollinger Bands?
The Bollinger bands can help identify overbought and oversold market conditions, protecting you against placing any orders that could lead to losses.
Andrew's Pitchfork Trading Strategy
Andrew's Pitchfork is a Forex trading strategy that can predict protracted market swings and help you in identifying potential market trends that can indicate potential exit and entry points.
Fibonacci retracements are one of the most popular methods for predicting currency prices in the Forex market. Predicting upward or downward market movement can help traders with accurate price analysis for exiting or entering the market.
The ABCD pattern
One of the most classic chart patterns, the Forex ABCD pattern represents the perfect harmony between price and time.
The Bearish Gartley Pattern
The Bearish Gartley pattern was introduced in 1935, by H.M. Gartley in his book, “Profits in the Stock Market”. The pattern helps Forex traders in identifying higher probabilities of selling opportunities.
The Bullish 3 Drive pattern
The Bullish Three Drive pattern in Forex trading is a rare pattern that gives traders information about the Forex market's potential at its most Bearish point, and in turn, suggests probabilities for a market reversal.
What is the MACD Indicator?
The Moving Average Convergence Divergence (MACD) indicator helps traders quickly identify short-term trend directions and reversals in the forex markets. You can use the MACD indicator to determine a currency pair price trend's severity and measure its price's momentum and even identify the bearish and bullish movements in the currency pair prices.
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