Trade Market Volatility

The following post was written and/or published as a collaboration between Benzinga’s in-house sponsored content team and a financial partner of Benzinga.

To start with, volatility is what drastically changes market prices. During periods of high volatility there are inevitably high risks and high rewards respectively. It is also true that volatility makes people question their trading strategies. This is especially true for novice traders, who may exit their position until it’s safe to get back in.

Online brokers usually provide some tips on their website on how to deal with volatility. For instance, IronFX has created a dedicated page for newbies, in their Trading School page. However, professional traders should also be up to date, as unexpected moves bring unexpected results. Therefore, keep in mind that due to the financial market’s nature of moving up and down over short periods of time, volatility is inevitable. 

Investing in a volatile market

In order to profit off the financial markets, there must be price movement. Fortunately, price movement is something that happens regularly in forex, with prices changing rapidly. 

The good news about volatility is that the more it increases the bigger the potential for higher and quicker earnings. However, as already mentioned, there are also higher risks in this case. As a result, traders need to develop a disciplined approach and manage volatility while reducing risks at the same time. 

One way to deal with volatility is to avoid it. This means hold your position and don’t pay attention to short-term fluctuations. 

4 tips for trading volatility

Here are four steps to consider when trading in volatile markets.

1. Set your objectives and boost your defense mechanisms

You need to make sure that you are mentally and strategically prepared to deal with increased risks before you even start trading in volatile markets. So, make sure that you are comfortable trading during high market volatility and that you understand the possibility of capital loss and additional risks. The next thing to do is revise your risk-management techniques as part of your trading plan and strategy. IronFX has useful tips on developing a solid trading strategy.

Be careful of position size and stop-loss placement. During volatile markets some traders place smaller trades and use a wider stop-loss. The purpose here is to prevent getting stopped out because of bigger-than-normal price fluctuations while attempting to maintain your overall risk exposure at about the same level. 

2. Chase the trending stocks

There are trending stocks with good trading activity despite the overall higher market volatility and risks involved. The key for a buyer here is to go for a stock that has been trending higher but the pace of its progress hasn’t accelerated. 

Similarly, a seller should look for a stock that has been declining but hasn’t already experienced a drastic decline. The purpose is to get in before any of the above price movements, not after. There is a wide list of trending stocks offered by different brokers such as IronFX.

3. Watch out for breakouts 

Another trading method commonly used among traders is the so called “buying the breakout” method. According to this, traders monitor stocks that are within a support and resistance range.

If the stock remains within that range, the trader remains inactive. However, if the price moves the other way, traders should buy the stock right away with the hope that the breakout will bring a positive movement for the stock again.

4. Go for shorter-term strategies

A shorter-term trading strategy involves taking profits more quickly than usual. This can happen by entering a trailing stop order sooner than you would normally do. You should also consider setting a specific percentage profit target or consider selling a portion of your position if it rises quickly and maintain the remaining position for additional profits.

Expect market volatility

With stocks moving faster and faster due to volatile markets, closer attention and a change in tactics are required. Preparing in advance is vital when trading with market volatility. 

The steps above do not guarantee reduced losses but rather ensure a better setup when you are about to take on volatile markets.

If you are uncertain about market movements and the effectiveness of your techniques, you should register with a reliable broker and get access to high-quality educational resources. IronFX’s trading school offers a good start for beginner traders, while more advanced content is also available.

The preceding post was written and/or published as a collaboration between Benzinga’s in-house sponsored content team and a financial partner of Benzinga. Although the piece is not and should not be construed as editorial content, the sponsored content team works to ensure that any and all information contained within is true and accurate to the best of their knowledge and research. This content is for informational purposes only and not intended to be investing advice.