One of the most intimidating aspects of the forex market is volatility.
Even though it is one of the most liquid markets, there are occasions when it tends to become very volatile, for example when new data is released.
For some time after data releases, the market exhibits confusion and this manifests in the shape of market not being able to form a solid trend, or if it happens, a lot of times there will be a V-shaped reversal.
There might also be a political event or a natural calamity that brings about a change in the economic set up and reflect in the standing of that particular currency.
We don’t realize how many factors affect economies every day until we take a close look at forex.
What should be the course of action in this situation then?
Given below are some of the steps one can take to prevent volatility from causing too much damage.
Learn to make profit from volatility
If you put your mind to it, volatility can be your friend. When the market is unstable, there are a lot of small fluctuations. Scalpers can make use of these small quick fluctuations and make profit off of them.
Once you’ve had some experience in the market, it doesn’t always have to be one strategy that you follow. If a favorable situation arises, don’t be afraid to make use of it.
Long term traders, know that you’ll be fine
As a swing trader you shouldn’t be too worried about small fluctuations. After economic releases confusion and instability only lasts for a couple of hours before the market makes a decision.
Now if you’re on the wrong side of this decision, that is worrisome, but anyone with practice and an understanding of the forex market should be able to guess the general impact that data will have on the market. If you’ve just realized that the USD will definitely take a hit after this, and you’re long on the USD, you might want to get out during the confusion, before that trend starts.
For the fortunate ones who find themselves on the right side, focus on the bigger picture. Sure, the market might be volatile now, but keep your eyes on the prize. If eventually it’s looking good for you, don’t panic and exit because of momentary confusion. When the dust settles and the real trend starts, you will be fine.
Don’t read news emotionally
A lot of times a trader will have a solid plan in place, but one piece of news will make them change it and end up in a loss.
You can’t let every bit of information influence your trading. This is because not every bit of news will have an impact on the market.
This problem is most common among new traders because they haven’t seen what sort of thing affects the market and what doesn’t. As a beginner, what you should do is, focus on the regular data reports only and consciously make the effort to not think emotionally.
It is easy to become too hopeful or too scared if one becomes obsessive about every little economic event around the world. Not everything will seep through charts. Even if it does make its way through, it will be absorbed.
The monthly economic reports, such as the non-farm payroll, are important because all the traders are reading them. And remember that it is in fact the traders who are running the market. There is no central headquarters of forex. So the NFP causes volatility because the majority of the traders expect it to.
This should have been the first on the list but we’re hoping you already know the importance of risk management by now. Let’s just revise some main concepts anyway.
⦁ With Stop Loss you can cut your losses so that even if the market takes a bad direction, you are still able to protect your account. ⦁ With Stop Loss you can cut your losses so that even if the market takes a bad direction, you are still able to protect your account.
⦁ , ideally 1% of your total account, means if you lose that trade you are still in a safe spot.
⦁ Setting Take Profit ensures that you don’t let emotions overpower your judgment. A lot of times if things are going well, greed can take over and cause one to stick around for too long turning a good profit into a loss when eventually the market turns against them.
These are some basic things that every trader should be paying special attention to, especially when the market is exhibiting extremely volatile tendencies. If you weren’t practicing them already, you can start now.