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A Few Tips on How to Trade During High Volatility in the Market

6:03 AM Jul 3, 2020
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Forex trading

Forex is famous for its high volatility. Thanks to that, in this market you can earn a lot of money even with a quite small investment. However, due to the prevailing economic instability around the world, the volatility in the foreign exchange market has become so high that traders have to find ways to adapt to it.

So, is there a way to make good money during the crisis without losing your capital? Of course, there is. Let's look at a few simple rules that will help you successfully and extremely profitably survive this period.

Stick to Your Plan

In the times when the market goes crazy, the price can rise or fall sharply. The desire is high to simply open a trade with the current direction and forget about everything else. Fight such thoughts.

No matter how attractive a trading opportunity may seem to you, don’t enter the market until you confirm the signal with proven methods and until you check the trade for all points of your risk management system. High market volatility not only opens up enormous opportunities but can also lead to a complete loss of investment. Discipline will become your integral friend during this period.

Optimize Your Systems

The situation on Forex is now developing quite dynamically. Strategies and Expert Advisors can quickly become obsolete. Analyze the trading journal and test your trading system in ways known to you as often as possible. This way you will receive the maximum from each transaction.

Use Different Timeframes for Different Purposes

This may seem unusual but you may need to use different types of charts:

  1. High timeframe (for example, 4-hour or 1-hour) to determine the main trend, search for suitable trading setups and set a Take Profit
  2. Low timeframe (for example, 15 or 5-minute) for choosing an entry point and setting a Stop Loss

Let's look at an example of opening a trade using this method. You notice that the market is consolidating by the resistance line on the hourly chart. To set entry and exit points, go to the 5-minute chart and select the levels that are as close as possible to that resistance. So the size of your loss in case of Stop Loss triggering will be several times lower.

Use Trailing Stop

Due to the high volatility, it is impossible to predict how far the market will go. If you don’t want to lose precious points, which can reach 100 or even 150 per transaction, then you should start using a trailing stop.

The trailing stop is the transfer of your Stop Loss level following the movement of the price to reduce your potential losses.

If you can’t constantly monitor the charts, you can use a special trading robot that will automatically trail your SL in your absence.

Clear Your Charts

With high volatility, it becomes difficult to trust your usual signal confirmation methods. Moving averages and overbought/oversold indicators (like RSI) become useless when the market behaves so irrationally. I advise you to clean your charts from excess noise and focus on price movement.

Follow the Price

Since volatility is caused precisely by economic and political events, traders completely forget about technical analysis and begin to closely monitor the news. This is a big mistake. Yes, various events have a huge impact on Forex, however, it is the traders who manage the price movement.

If some economic indicator tells you that the trading instrument has to grow when it actually goes down, forget about the news and focus on the chart. Only following the price action will help you to linger on Forex during such times.

Exit Trade After a Sharp Price Movement

I don’t mean a movement by 200 points during half of a day. During high volatility, this is quite normal. I'm talking about a sudden jump for those 200 points but for a maximum of 5 minutes.

If you were lucky to open a position in the right direction during such a movement, then don’t play with fate and just close the trade right after the jump. The chance that the price will continue to move at the same pace and in the same direction is extremely small. While the probability that you will lose the profit if you don’t exit the transaction on time is almost 100%.

Get Rid of Bias and Lower Your Expectations

You should not expect any specific behavior from the market. Even during high volatility, the pair can begin to move sideways in a quite narrow range. It is important not to make any assumptions and base your decisions solely on price action.

It is also crucial to remember that good luck and high profit in one or even several days in a row does not guarantee you success in the future. You can stop making money or even start losing it in no time. The main thing is not to despair and continue to follow your plan.

Final Words

Let's summarize and list what will help you survive and even get rich during high Forex volatility:

  1. Follow your plan and check it as often as possible
  2. Trust the charts, not the external events
  3. Use timeframes correctly
  4. Set a narrow Stop Loss and use a trailing stop

Also, try reviewing your risk management system. Perhaps it is worth making adjustments to it, given the current situation. Some should trade with less volume and some need to reduce the leverage size.

The most important thing is to understand that trading during high and low volatility is very different. Simply adapt and you’ll have all chances to use this period for your own benefit.

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