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/ Market Analysis / News & Analysis / Volatility Trading: How to Leverage Products in a Volatile Market
/ Market Analysis / News & Analysis / Volatility Trading: How to Leverage Products in a Volatile Market
Dec 02, 2021

Volatility Trading: How to Leverage Products in a Volatile Market

by Blueberry Markets
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When it comes to volatility trading, it doesn’t matter if the market goes up or down. Only the swings matter because traders can reap profits from both falling and rising markets.

 

Traders can make even larger profits by trading leveraged products in a volatile market since leverage allows them to enter big trade positions with smaller deposits. As currency pairs with high volatility witness price fluctuations rapidly, they allow traders to benefit every single day through day trading. In our article, we talk about how you can leverage products in a volatile market and make significant gains.

 

 

What is volatility trading?

Volatility in trading is the measure of how much the prices of an asset change over time.

Traders usually go for volatility trading to earn high returns in a short period of time, and they track the changes in the prices regularly through minute and hourly charts. The main focus of traders during volatility trading is on the weekly and daily price movement of a currency pair, so they can buy and sell them at prices that are profitable for them.

 

 

Top three volatility trading strategies

1. Contract for Differences day trading strategy

When you decide to trade CFDs in a volatile market, you look closely at the moving prices of the contract for differences in a short period of time. If the prices move rapidly during the day with high volume, it sends an easy exit and entry signal. Here is when you can take advantage of the volatile market to day trade CFDs and earn significant returns.

A volatile CFD will fluctuate in price by great percentages throughout the day. The CFDs can move as high as 5 to 10 percent every day consistently, allowing you to trade the large movements per day. You can study the historical price movements of the asset associated with your CFD to expect the price fluctuation and make trade decisions accordingly. The assets that have had large price movements in the past are expected to move similarly in the current market as well, allowing you to trade the volatility in the CFD market.

 

 

2. Volatility breakout trading strategy

A breakout is when the price of a contract for difference or the currency pair prices go beyond the resistance level or below the support level, indicating a new direction of the trend altogether.

The average true range is a good measure of volatility breakouts that enables you to regularly track the typical movement in each price through candlestick patterns. As soon as there is a sharp rise in the average true range, a strong price movement is expected to come along with the breakout. Entering a trade at this point is a strong move in the Forex or CFD market.

 

 

3. Long call diagonal spread strategy

The long call diagonal spread strategy is the ideal strategy to trade volatile markets that are range-bound. When a market moves in a particular range, you can focus on the volatility and its price effect more clearly. The long call diagonal triggers you to either enter a trade position or exit one.

Each long call diagonal spread strategy comes with a selling out of the money option spread and buying in the money option spread. The two options come with the same strike price but different expiry dates. It helps you benefit from short-term price fluctuations in the Forex or CFD market. You buy the CFD or currency pair that comes with a distant expiration and sell a CFD or currency pair with a closer expiration to benefit from the difference between the two prices.

 

 

Trading leveraged products in a volatile market

You can trade CFDs and currency pairs on margin to get greater market exposure and higher profits. For example, if you decide to trade EUR/USD in the Forex market and notice the position moving 2% without leverage, you gain 2% on the total value of your position size.

However, if you trade the same currency pair using leverage, with a leverage ratio of 10:2, the 2% price move will result in a 10% profit on your holding. However, when we consider leveraged position through volatility trading, if we assume the same currency pair price is now moving with a 6%t price swing, it would result in a total of 60% profit on your total position. You can leverage contracts for differences in a volatile market in the same way.

Hence, you can use leveraged products in a volatile market to reap profits that you would not gain otherwise during a stable market. Trading with leverage allows you to use funds over and above what is available to you currently and make greater profits by investing considerably lesser capital.

 

 

Top tips for trading volatile markets

1. Always use stop-loss orders

When using a stop-loss order in a volatile market, you are provided with the exact risk that you are willing and able to take. Using stop-loss orders reduces your market risk by selling the position at a predefined rate, below which the market will lead to losses you cannot handle.

 

 

2. Emotional control

The more volatile the market is, the more it influences your emotions. A rapidly falling market can lead you into selling off your assets too quickly in fear of incurring losses, whereas a rapidly rising market can lead you into buying more assets at unreasonable prices.

 

 

3. Stick to the trading strategies you choose

Volatile markets can often lure you into changing your strategies as the market changes. However, it is always advised to stick to the trading strategies that you have tried and tested in the market conditions. You must have a set of fundamental guidelines that help you place successful trades.

 

 

Trade with us to take advantage of the volatile markets

 

 

You can profit in rising as well as falling markets with rapid price fluctuations. Trade the leveraged products to hold significant positions in the Forex and CFD market by investing only a certain percentage of the total trade value. Blueberry Markets give you all the tools that you need to trade volatile markets and more.

 

 

Sign up for a live account with us to get started today.