Are you getting caught up in highly volatile market moves while sentiment keeps shifting on a dime?
Here are some adjustments to consider.
What is volatility anyway?
Volatility refers to the amount by which an asset price fluctuates over a time period. It is measured by taking the standard deviation or the variance of price changes over a specified duration.
Whoa, that’s a lot of financial mumbo-jumbo!
Simply put, volatility measures how moody the markets are.
News releases in a not-so-volatile market environment are like your average weather report. Some might not like it, but you won’t see blood on the streets over it.
On the other hand, a volatile market environment means that positive AND negative price reactions will likely be magnified.
So how can you prepare your trading plans for this?
1. Sharpen your trading focus
As the Brits would say, keep calm and carry on. Perhaps the worst way to deal with potentially higher levels of market anxiety is to be increasingly anxious as well.
Remember that a pickup in volatility makes it even more crucial to maintain a focused mindset and keep your emotions in check.
Remind yourself to stay calm even if price action gets extra jumpy, concentrating on your trading plan instead of panicking when you see sudden market moves.
This can help you keep a clear head in evaluating any new catalysts that come up then adjusting your positions accordingly.
2. Adjust your stops and targets
Tight stops in a volatile trading environment could wind up doing more harm than good. After all, forex pairs could quickly spike to these exit levels just before heading in the direction of your trade.
That’s gotta be frustrating, right?
To determine how much leeway you should add, start by taking note of the changes in price movements for a trading day. From there, you can make the necessary adjustments in your stops and profit targets.
If you’re looking for some historical data on volatility and average pip movements per pair, MarketMilk has got you covered yo!
3. Shift your trading style
Having a specific strategy for rangebound days with low volatility or for a trending environment gives you the flexibility to adjust to different market conditions.
In particular, shifting from longer-term to shorter-term setups during more volatile situations could work in your favor. You might not want to keep positions open for too long, especially since price jumps can take place before you know it.
4. Sit on the sidelines
There’s no shame in refraining from taking any trades during volatile market times!
Deciding against taking a particular trade setup or staying out of the market altogether is a valid risk management decision in itself.
Instead, remind yourself that there will always be other (and possibly better!) trading opportunities later on.
There’s no need to chase big price moves if you’re not too confident about it or if your gut tells you to hold out. If you don’t have a clear plan for a volatile market scenario, you might even be saving yourself from potential losses by sitting on your hands.
