Some pointers on handling market volatility
In the last five months, the forex market has gone through countless cycles of crashes and booms. While some shrewd traders have capitalised on the price swings to make decent profits, others have lost a sizable portion of their trading capital.
In this article, we'll be sharing six tips that can help you trade the forex market during volatile times and take advantage of the swings like a smart trader.
Let's dive in.
1) Define your risk profile
The first thing to do whenever the market is as volatile as it is these days is to understand your risk appetite. While volatility comes with enormous profit opportunities, it can also drain your account. So it is vital to find out the risk level you can stomach.
If you are inexperienced or experienced but risk-averse, you can cut your risk by taking smaller positions and using little to no leverage. This way, you will make small profits when the market moves in your favour and of course, minimal losses when it doesn't.
On the other hand, you could get massive returns when your positions are correct. There is no right or wrong way to go about this; it all depends on your risk appetite.
2) Plan according to the times
Once you have established your risk threshold, the next step is to create a strategy to match
current market conditions. You may have read dozens of posts advising you to stick to one
trading plan, but such methods rarely work in volatile markets.
At times like these, your strategy shouldn't be to hold a long position and wait for the market to normalise. Instead, you may want to focus on opening short positions to take advantage of the swings.
Remember: a long position refers to buying an asset with the expectations that it will rise in value, whereas a short position represents the opposite - profiting from the fall in the asset value.
A good starting point would be to understand the market conditions, know the circumstances that move it, set a goal, and factor everything into your plan.
3) Focus on trading major pairs
While there are many currency pairs available for forex trading, in times like this, it is better to stick to trading major forex pairs.
This tip is particularly important for beginner retail traders because of the following reasons.
A) Major pairs like USD/EUR, USD/JPY, USD/GBP have a high level of liquidity, even during a crisis. Thus, opening and closing positions won't be a problem because there will always be demand and supply for the currencies you are trading.
B) Apart from the high level of liquidity for these pairs, during a crisis, media outlets, economists, and currency experts focus on analysing events in major economies and exchanges. Therefore, you will always have enough information to make smart trading decisions.
4) Focus on derivatives
During periods of high volatility, it may be a good idea to trade derivatives for the reasons below.
A) Trading forex as derivatives means you will not be required to buy the underlying currencies. You only need to predict how the market will move and earn a payout if your prediction is correct.
B) When trading derivatives, your risk is often limited to your stake. This means that if the market moves against your prediction, you will only lose the amount you staked. This is not true in all cases, but on platforms like Deriv.com, you can trade forex as derivatives while limiting your risk to your stake.
C) Trading derivatives allows you to take short bets quickly as the market fluctuates. You can open positions of different durations, from five seconds to a few hours. Doing this may help you profit as the market crashes and rebounds throughout the day.
5) Keep an eye on your trade
While swings make the market unpredictable, big profits also lie between those up and down movements. But it is vital to keep an eye on your trade to know when to take profits, stop a losing trade, or adjust your strategy.
Also, try to set stop-loss and take-profit levels when trading. This will help you to manage your risks better.
6) Know when to stop trading
Another vital tip for trading in volatile times is to set a daily limit for yourself.
If you are losing money, know when to stop trading to give yourself the time to review your trades. If you are making profits, know when to stop to keep your gains for the day.
Knowing when to stop trading for the day is also a sign that you are a disciplined and mature trader.
We hope you found these tips helpful. Ready to put them into practice? Head over to Deriv.com and create a free account today.
This article was submitted by Deriv.
