Forex Strategy: Tips for Trading in Volatile Markets
For day traders, trading in volatile markets can be advantageous, but err on the side of caution. Why? Larger swings can lead to massive profits if you guess right or huge losses if you guess wrong.
So how can you approach Forex trading during periods of increased volatility? Your options range from small steps like increasing vigilance over your open positions, to the more dramatic like avoiding day trading all together. Here are a few things you should consider when trading volatile markets:
Be Cautious With Leverage
In stable markets, leverage is your friend, helping to increase gains and maximize profits. But in volatile markets, high leverage can be your enemy, resulting in dramatic losses when the market swings against you. That's why you should reduce your leverage when the markets are volatile. Although this can reduce your profit, it will also lower your risk, helping you to avoid losses that can quickly add up.
Avoid Margin Calls
Significant market fluctuations can lead to the day trader's worst nightmare: the dreaded margin call. When your positions are automatically closed, your losses are locked in. So what can you do to avoid this? First, it may be beneficial to increase the capital in your trading account. This will help cushion your open positions against the margin call. Additionally, reducing the size of your positions and tightening your stop-loss orders will help limit your exposure to volatile market swings.
Fundamental Analysis Is Key
Although many day traders tend to focus on technical analysis, during periods of volatility, it's imperative that you pay closer attention to market news. Already volatile markets are more prone to reacting to monetary policy news, economic reports, and political volatility. By keeping a closer eye on these developments, you will have a better idea of when to avoid trading or trade more cautiously.
Increase Vigilance Over Open Trades
Day traders typically keep a watchful eye over their open positions. Yet, for longer term traders who might check in on their trades more sporadically, that can be extremely detrimental. In volatile markets, watch your positions more closely to avoid missing a large swing against your position. One strategy for addressing this, though, would be to automate the process as much as possible. Use stop-loss orders to limit your risk and close unsavory positions. And conversely, set take-profit orders to close profitable positions.
Avoid Trading Altogether
To the Forex day trader, it might sound unorthodox to avoid the markets altogether, but sometimes that's the best strategy to missing those volatile swings. True, you might miss out on profits, and that's why some traders increase their trading to capitalize on volatility. But you'll also protect yourself against unpredictable market fluctuations. If you do decide to trade, be less aggressive in your trading. Choose trades more carefully and consider entry and exit strategies wisely.
