For forex traders, volatility is often something to be welcomed, as it brings trading opportunities. However, when markets move up and down during volatility, it can also make decision making harder, especially for new traders. In such conditions, stopping trading is often a good idea; however, if you are courageous enough to ride on these giant market waves, you are standing right in front of opportunities to make huge profits. This article will give you 3 tips to trade effectively in a volatile market.
Tip #1: Have a Systemized Approach
Emotion is the enemy of traders. it can cause us to make hurried and inaccurate trading decisions, which can turn winning trades into losing trades. In a worst case scenario, if we let our emotion overwhelm us, we can easily fall into crazy trading situations and quickly lose our money.
Our psychology is often affected by market’s uncertainty, so the advice “don’t let your emotion affect your trading decisions” is usually easier said than done. Nonetheless, we can use methodical techniques to help. By developing a systemized approach, you can keep your emotions at bay when trading.
So how can we have a systemized trading approach? The answer is keeping a trading journal. You should record all your trades, the reasons for opening the trades, how well you managed them, and what can be learned from those trades. This helps you know how your trading activities performed in black and white, and what improvements need to be made for future trades.
Tip #2: Be Selective
The market’s volatility has an irresistible temptation: it makes market participants willing to take higher risk to derive profits. Beginner traders are often more aggressive during volatile periods and can place big trades without caution, and are therefore at higher risk of loss.
You should remember that if there are trade opportunities to make profits in an unstable market, there’s also a possibility that you can lose your money. That’s why it’s a good idea to consider your risk tolerance. You shouldn’t place too many trades; instead, be selective and cautious with the opportunities the market presents you. Also, you should make sure that the risk-reward ratio of the selected trade opportunities is acceptable to you.
Tip #3: Tighten Your Stop Loss
One of the most efficient techniques to trade during the volatile periods is tightening your stop loss. With tight stops, the position of your currency will be safeguarded.
For example, imagine that you are watching the market and see a nice trade opportunity. You aim to place your stop loss 50 pips away from your expected entry. After entering the market, you sit back.
Is everything done? No, it’s not done yet. If you want to improve your trade, there will be 2 ways:
- Recalculate your stop loss level to see if you can save any pips.
- Trail your stop loss level if the market is moving toward the expected direction.
Every time when you open an order, ask yourself whether your stop loss level is the best or you can save some more pips. Every pip you can save will bring you money in case the market doesn’t favour your prediction. Besides, when your analysis is correct, don’t just leave your trade there; you should trail your stops to guard profits.
With that said, you shouldn’t tighten your stop loss too much or trail too soon; otherwise, you can fall into your own trap. The key to tightening your stop loss effectively is being cautious.
The Bottom Line
So, here are the 3 tips you could use to trade in a volatile market:
- Have a systemized approach
- Be selective
- Tighten your stop loss
Please keep in mind that trading in volatile market conditions is challenging and only recommended for expert traders. And remember that some markets such as cryptocurrencies can be more volatile than others. If you are new to Forex trading, the best idea is staying out of the market when it is oscillating, and waiting for more stable conditions, until you have enough experience and confidence to trade volatility.