Foreign Exchange (FOREX) trading can be inundated with volatilities. If you are not careful, you will lose a lot of money in the process. Yet, experts say that the volatility in the market is the major reason for the high success rate. As such, you want to master how to trade volatility in the Forex market to win big, irrespective of the direction the market swings.
What is Volatility in Forex?
In the Forex market, volatility refers to the large upswings and downswings in the value of a currency pair during a trade. This is why the USD will be trading for a particular amount right now and in a couple of hours; the price changes.
Strategies for Trading Volatility in Forex
In this section, we show you how to trade the volatile Foreign Exchange (Forex) market.
1. Trade the “News”
It is interesting to note that the Forex market is often dictated by the turnaround of global events. For instance, news of a war breakout or a looming economic crisis could trigger a change in the market.
Therefore, to be successful at Forex trading and to seize the opportunity it presents; you want to trade the news. Check for the latest trends around the world, especially the ones that directly affect finance. That would provide you with a sense of direction as to how volatile the market would become.
2. Understand the Pairs
In Forex, you are dealing more with currency pairs – the addition of two (2) currencies to be traded as one. Hence, you need to understand the metrics of these pairs and their performance over time. If you research very well, you will find out that some currency pairs, in the last couple of months, have performed favorably.
3. Familiarize Yourself with the Indicators
Irrespective of how expert you have become in the market, one of the crucial metrics to consider is the trading indicators. These are the likes of:
- Trading volume
- Relative Strength Index (RSI)
- Bollinger Bands and;
- Average True Range (ATR)
Understanding what they have to offer and the different ways to optimize them will help you stay ahead and remain profitable – even in a volatile market.
4. Use a Trading Journal
A trading journal is more of a “diary” that helps you document your efforts over time. This can also form a part of the trading strategies you will develop later on, as they provide you with insights into what you’ve done, how they worked, and what didn’t work.
5. Develop and Stick to a Trading Strategy
The most successful traders follow a “pattern.” Most times, it takes a lot of effort, dedication, and consistency to develop a “perfect” plan for trading. This is what is called a trading strategy – and you need to have one.
While the strategies may differ by the traders, a couple of tactics have been back-tested and found to be very profitable. Examples are:
- News Trading: this strategy is a part of Fundamental Analysis (FA). You are following the information in the news and using that to pattern your trades accordingly.
- Breakout Trading: sometimes, the chart and some of the Forex trading tools will show you that the value of a currency pair is about to go high or low. If you are not careful and informed, you may make the mistake of opening a position at that time. The best method is to wait for such a pair to “break out” to confirm the validity.
Also Read:
- Top 10 Mistakes to Avoid While Doing Intraday Trading
- What Happens to the Economy If the Stock Market Crashes?
- How to Pick the Right Dividend Stocks that Are Recession-Proof
6. Use Position Sizing
You can trade volatility in the Forex market just by managing your risks effectively. Using position sizing is a good way to do that. It involves using only a smaller amount of money to open a position. You also want to stick to losing only a fraction of that amount before closing the trade – assuming it is not profitable.
7. Always Look at the Charts
Using the charts will help you get an overview of the Forex market, noting the loopholes or gaps and making a mental note of what it would likely take to fix those.
For the best results, combine the use of Forex trading indicators with the charts to predict the market.
8. Patience is Key
Be like the vulture – always be patient when trading a volatile Forex market. Here’s why:
- The market may not go the way you hoped or predicted it would.
- There is a need to wait for the market to close for the day before deciding on the next line of action.
- Develop and stick to your trading plan. You might just make a mistake and all your positions will “crash” like a pack of cards.
9. Always “Stop Your Losses”
There is a trading tool called Stop Loss. It helps you put a specific amount you are willing to lose in a trade or the percentage of the position sizing you are ready to lose if the market “goes against you” as a mark of the forex trading volatility.
10. Using a Stop Loss is advised if:
- If you have little capital. It helps to protect the rest of your money from getting liquidated.
- It helps you lose an amount of money that you are comfortable losing.
- Using Stop Loss is a great way to reduce your risk exposure, especially if you are using leverage to trade.
11. Don’t Go All-in with Leveraging
Leverage in Forex trading is a strategy that allows you to double or triple the potential profits, as well as the losses. You could use anywhere from 2x and 50x, depending on the currency pair.
However, if you are trading in a volatile market; it is best advised to keep the leverage low. For example, if you have $100 in the market and trading with a 10x leverage; your potential profits will be multiplied by 10 – just like your losses.
So, if you don’t want to lose much (that is, if you don’t use a Stop Loss); use less leverage to trade.
Also Read:
- 7 Basic Tips on How to Manage the Finances of Your Small Business
- How to Analyze the Stock Market in 5 Minutes like a Pro
- A Step-by-Step Guide on How to Develop a Financial Plan for Retirement
Final Thoughts
The Forex is no doubt, a volatile market, and in such a volatile period, wins and losses can be recorded in a tiny frame of time. We do hope that the volatility trading tips shared in this article will help you make more profits than losses.
