Forex is among the world’s largest and most liquid trading marketplaces. As with other markets, there are times when trading forex can be extremely volatile and fast-paced. While forex volatility can provide abundant trade opportunities, it involves some special challenges and precautions.
1. Manage Risk
When trading forex in a volatile market, managing risk is crucial. This rule not only applies to forex but to all tradeable securities – risk management should always be in the forefront of traders’ minds.
One general rule of thumb to follow is the higher the volatility, the stricter the risk management. Considerations such as position size and stop loss orders can help traders reduce exposure to unpredictable markets and protect investment capital. However, traders should keep in mind that a stop loss order does not guarantee a safe exit, and all exposure to risky markets should be properly managed.
NinjaTrader’s Advanced Trade Management (ATM) feature allows traders to quickly and easily pre-define trade entries and exits which bracket a position as soon as it is initiated.
2. Track and Follow Trends
When trading in a volatile market, tracking trends becomes more important. While volatility generally implies a change in a short-term trend, longer-term trends often continue intact.
Some forex instruments will remain in a trend for years at a time and, if a close eye is kept on both the long-term trend and short-term volatility, traders can take advantage of volatile moves for strategic entries and exits.
Using higher time frames within charts can be extremely valuable in this sense. For example, a trader who typically uses hourly trading charts may decide to view daily or weekly charts for a broader perspective. In other words, focusing on the big picture instead of intraday hysteria can often help traders to clarify their biases.
For example, in the chart below we see that on a 120-minute timeframe, there appears to be a downtrend in the EUR/USD forex pair.
However, viewing the higher time frame daily chart below we can see that although there was a pullback, the general EUR/USD remained in an uptrend over time. The entire chart above is represented within the blue rectangle below.
When a long-term trend changes, this can introduce even more uncertainty to the market. In such cases, some traders may choose to trade a difference currency pair or remain on the sidelines until a trend has been reestablished.
3. Avoid Distractions
Outside influences such as news tickers and social media can be a detriment to a trader’s concentration. One headline or tweet can not only distract a trader, but can also influence decisions. This can result in traders abandoning their own analysis and trading based on emotion or false hope.
For example, a EUR/USD trader might formulate a trading plan based on a headline regarding economic turmoil in Europe but that information has already been “cooked in” to the price action.
Short-term market analysis can quickly become irrelevant especially during high volatility which can lead traders to react impulsively to outside influences. Formulating a trading plan which includes appropriate risk management is of utmost importance.
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