A trading strategy that doesn’t take into account market volatility will eventually fail in an irreversible way.
Volatility is a trait of the investment markets that results in prices making drastic changes without cause. We tend to witness volatility in short-term trends. Any hyperfocus that traders have on short-term trends will cause them to overreact when volatility hits. Avoiding the emotional pitfalls of volatile markets is necessary if you want to preserve capital. Here are some tips to help you endure volatile markets:
Start Your Trading by Making a Decision
Before responding to market conditions, consciously decide if you should enter a trade or not. Volatile markets have a tendency to lure investors into false sentiments. A rapid rise in prices can give you a false signal that prices are rising, but do analysis before your trading.
Measure the Long-Term Outlook
Long-term trends help investors to put volatile markets into perspective. Start your trading by confirming what the long-term trends are to see how superficial volatility can actually be. Only enter volatile conditions when short-term trends align with the long-term ones.
Find the Rate of Volatility
Your next step should be to confirm the increments that a volatile market is moving in. Volatile spurts can move in terms of 35 pips for every rally achieved in the foreign exchange. Stock prices, on the other hand, might move by 3 or 5 dollars for every volatile exchange.
Enter Using Limit Orders
Having a strong grasp of price values in a volatile market equips you to make a trade with competency. You can minimize risk by relying on limit orders during volatile conditions. Unlike market orders, limit orders activate your trade at the exact price you specify. You want to avoid market orders, for due to volatility, you won’t know the price a trade will enter at.
Identify Your Risks
Risk is the ultimate reason why you need a safer strategy when trading volatile markets. Investing already has its risks, but volatility increases market risks in a way that leaves you more exposed than what you can usually handle. Take into account the tips above, and be patiently cautious if you find volatility.