Traders who are more risk-averse are at greater risk for loss, yet have more opportunity as price moves are larger. If you are a risk-taker, volatility can be beneficial to you. The good news with volatility is that as it increases, the potential to make more money quickly also increases. The bad news is that higher volatility also means higher risk. But, if it’s all that, why not to bet on a single number on roulette? That has high risk and high reward, too. Well, the difference is that you can up to an extent, use your knowledge and skills to predict the market more efficiently than the others. And that is what makes Forex a game of skill, rather than a game of Roulette.
What comes more with volatility, risk or reward?
This is completely respective to your own trading skills, whether you want to be destroyed by volatility, or use it as your weapon. This sounds really easy, and is just that difficult to implement. Professional traders detect the “quality” of the volatility, and they completely ignore the market once they smell any sort of undefined volatility, like the one during the “October Effect“. When good traders find a healthy volatile market, they will just dive into it and make a tasty profit. Again, “healthy” is the word of emphasis.
Tips, Strategies, and Cautions for Trading Volatility
Volatility does not only affect the financial market, but your real life too. To use volatility for good among many other options, here are the trading strategies and tips to consider: By implementing them you do good not only for your trading success but truly also for your overall mental and emotional well-being.
Volatility Squeeze Strategy
As volatility can be your pleasant pal or your worst enemy in trading, it’s all about the way you understand that volatility, and the way you try to capitalize on these marketplace conditions even as minimizing your risk. The volatility indicators will assist you get a higher examine on an uncertain state of affairs, which can lead to timely trades that turn volatility right into a triumphing proposition.
Volatility squeeze is the combination of the Keltner channel and Bollinger Bands, figuring out a likely breakout opportunity for a currency pair. The volatility squeeze happens whilst the Bollinger bands pass inside the Keltner channel.
Typically, the Bollinger bands sits outdoor the Keltner channel, however a period of consolidation can pull them in, creating a narrowing which could in the beginning seem to signify decreasing volatility. The Keltner channel, but, offers context that could assist buyers understand this narrowing as a likely main indicator for a breakout within the near destiny. The Volatility Squeeze is one of the best ways to use ‘Volatility” as your trading weapon.
Also Read: Bollinger Bands + RSI: Best Strategy
Leverage Management
Leverage in trading is something all traders have to face. It is used more in the forex market than the stock market. The ratio of leverage, too, is far higher in Forex than in stocks. Opening a spread betting or CFD trading account, courtesy the leverage, traders can use a small percentage of money of the full trade value. This allows traders to have more action while trading, as they have the opportunity to magnify their profits. This can, however, also result in the opposite direction of magnified losses.
In a volatile market, the last thing you want to do is to use a high leverage. Some amateurs use leverage as high as 1:500 during the busy trading hours. If you do this, you have a potential to lose all your money within a week.
Forex traders with more experience of volatile markets and closing quick positions may thrive off a higher leverage ratio, as the payout will be worth the risk if successful. If you are trading with leverage, make sure you have a plan for how you will manage your positions if the market starts to move against you.
Emotional Attachment and FOMO
The volatile hours can be good for trading if you know what to avoid. One secret thing to avoid is getting too emotionally attached to your positions. When the market is volatile, it can be easy to get caught up in the excitement or fear of the moment and make impulsive decisions.
It is important to remember that you are trading to make money, not to prove how smart you are or how right you were about something. If you find yourself getting emotional about your trades, it is time to take a step back and reassess your strategy.
Finally, avoid getting caught up in the “fear of missing out” on a rally or a drop. It can be tempting to keep buying as the market goes up or to keep selling as the market goes down, but this can be a recipe for disaster. FOMO + Volatility = Diaster x 2.
Bottom Line
Forex is a game of skill. As such, it’s necessary to understand that volatility is not always good for trading. If you want to use volatility as your weapon, you must use the correct leverage ratio, and must be able to differentiate between healthy and undefined volatile market. To differentiate that, you need to use your instincts as well as the economic indicators.
