In forex trading, increased volatility means more risk and the potential for higher returns. So for those short-term market speculators who are willing to take the risk in order to make the reward, the more the volatility, the better.
Volatility is defined as the measure of how far the market is moving within a given cycle. Within the forex market, it means wider cycles between the price highs and lows. A more volatile market opens up more opportunities for traders to make a profit in the shortest period of time. In general, the bigger the price swings, the greater the likelihood for the markets to move, which means a greater opportunity for traders to make a profit from each trade.
How to Benefit from a Volatile Market
Avoid Panic Selling
It is only natural to see increased market volatility as a good time to exit a position. However, that’s not always the best option in forex trading. There are big opportunities to be had, but when you panic and sell at a much lower price, all you get are huge losses. Remember, even while the market is in free fall, during periods of high volatility, it’s still likely to pick up again. So patience is a virtue in these situations and holding could pay off.
Use the Buy and Hold Strategy
If you’re risk-averse, you can always use the buy and hold strategy during a volatile market. That’s when you opt for stable options that will offer consistent earnings, instead of making short-term trades. The approach works particularly well during high market volatility. It’s a way for traders to make sure they’re not affected by any short-term volatility.
Understand the Bigger Picture
It may look like there’s no clear direction to the market during periods of high volatility. However, the direction is often revealed when you take the time to examine the bigger picture. It can pay off to take a step back and observe the support and resistance level of higher time frames. This helps identify trends, the best entry spots, and avoid over-committing to smaller time frame indicators.
Use Lower Leverage
Leverage is a great way to maximise your profitability with a limited amount of capital. However, it needs to be managed to mitigate risk during periods of high volatility. A good way to do that is to lower your leverage amount if you widen your stop loss target. Basically, adjust the leverage in your account so that it maintains the same risk ratio that was there during times of low volatility.
During periods of high volatility, it’s a smart move to lower your stop losses and take profit targets. Place your stop near the top when selling and close to the bottom when buying. You can never tell when the price will break out of range and how far it could run.
Without some volatility, it would be impossible to make a profit in the forex market. Still, trading during periods of high volatility has its risks. If you’re confident in your strategy and understand how your trades will be affected by the market’s movements, then you can position yourself most favourably and turn a highly volatile market into a highly profitable one.