How to trade forex when volatility is high
High-volatility forex markets are attractive, but it can result in considerable losses for many traders. Forex markets move more than usual following an important news event or a break of a significant price level. This article will introduce tips to help you thrive when the market volatility is high.
Volatile markets can be exciting, and it is easy to want to trade more than usual. However, trading out of your comfort zone and not waiting for trades aligned with your strategy can lead to significant losses in volatile markets. Avoid making impulsive trades or letting emotions drive your decisions.
Remember you are trading to make consistent profits, not for excitement, so focus on staying calm and following your strategy. Any time you feel that you are starting to deviate from your trading plan, stop trading immediately and have a short break.
Understand the fundamentals
Major news events, economic data releases, and geopolitical developments often drive high volatility. So stay up-to-date with the latest news and understand the market fundamentals well. Understanding the impact of changes in the fundamental environment will help understand whether high volatility is likely to continue or just a temporary rise.
Fundamental analysis is difficult and confusing for many traders. Market analysts usually have different opinions regarding future price movements, as forecasting is complex. Rather than trying to predict the market understand that changes in the fundamental picture can help you forecast increases in volatility and opportunities to extend your profitable trades.
Change your risk management strategy
The potential to make larger profits is greater when the market moves more than usual. Of course, increasing your profit target alone is ideal, but the increased volatility will increase the chance your stop loss is hit before your target. So look to increase your stop loss but do not increase it as much as you increase your profit target.
The increased stop loss will increase your risk per trade, so decreasing your position size will allow maintaining the same percentage of your account balance per trade. Suppose you notice a sudden increase in volatility. In that case, adapting your risk management plan quickly can be challenging, so waiting a short period to see if the rise in volatility is temporary can be beneficial.
Choose the right trading strategy
High volatility increases the likelihood of a strong trend developing, so it is initially best to look for trend trading opportunities when it rises. Also, when trend trading, avoid the temptation to panic and follow the trend when there is a large gap from the moving average. Following the initial quick move can be difficult as volatility is high, and your stop loss can be hit easily. When trend trading, remain patient and wait until the market returns closer to the moving average or trend line to follow the trend.
However, if the moving averages point sideways, looking for range trading opportunities is best until a trend develops. When range trading, look for the market to move a larger distance from the moving average than usual. High volatility markets can present many short-term reversal trading opportunities but use a small stop as if a trend develops; your losses could be significant.
High-volatility markets are what most traders want, as they present more opportunities for large profits and active trading. But, remember, it is better to make one good trade than many poor trades and do not get excited when you see significant market moves.