Forex trading involves comparatively higher volatility in the financial market. Volatility is identified in two different forms namely, historical and implied. The normal price action over a period of time is categorized as ‘historical’ while, the abnormal current and future price action is categorized as ‘implied’ volatility. The implied volatility generally exceeds the historical range when the two are compared.
The market itself is dynamic in the sense that for certain periods of time it may seem slow moving or stagnant but then in a matter of hours and hundreds of pips may move. It is this volatility can be used to the best of advantage and making big moves. This can only be achieved when you play your cards right.
The first step towards handling volatility is widening the take profit loss targets. To survive in a volatile market which may run hundreds of pips in one direction and in turn making deep retraces after every leg it is best to increase your stop loss and take profit targets. This not only avoids whipsawing but also minimizes the losses and increase profits by widening the profit potential.
While leverage allows one to make large profits it is one of the prime killers of forex accounts. So, when widening the stop loss target, adept calculations are almost next to compulsory to lower the leverage amount in a particular account. This helps in maintaining risk in the same ratio as under normal circumstances.
Another vital component in a volatile market is minimizing losses. When the price action is choppy and the moves made are large Forex Brokers advise to use smaller stops with big take profit targets. Where this may be contradictory to the other technique it usually gives best results in rangy markets. When a range is established by price and is being traded inside it, stop close above the top needs to be put when it is sold below the bottom when bought. In situations that are unpredictable towards the range of price it is safer to keep a tight stop loss.
Diversification in the portfolio is one the major techniques to survive in the long run. Different instruments in various markets can help to diversify your portfolio. It becomes all the more important in a volatile market when the uncertainty increases during times of high. Funds can bring in hefty profits when traded into several pairs in different directions.
A choppy market may look like it’s moving around without a velar direction hence, the importance of the bigger picture. The more important support and resistance levels of the higher timeframes can be assessed to minimize overtrading smaller timeframe indicators.
As much as the trade may be lucrative it’s best to move out when you have made enough profits. Lastly, avoidance is the key to filter out the profitable pips. When unsure about the direction of the market it is best to wait and assess before making any rash decisions or better yet, stay away until a good opportunity comes by.