The Forex currency markets are regarded by financial market followers as being above average when it comes to volatility. There can be no doubt that this perception is amplified by the widespread use of leverage by almost all participating spot foreign currency traders. There are certain important things that Forex traders need to do to survive highly volatile markets. This article should serve as short guide to you for surviving those volatile foreign exchange rate market trading environments.
Trading psychology is a major factor impacting the results of all Forex traders. The mood a currency trader finds himself in while engaged in Forex trading will have a profound effect on how he views and interacts with the exchange rate market. Below we will outline some of the more significant challenges and solutions that traders will be faced with during the inevitable periods of high exchange rates currency market volatility.
Volatile markets move fast, and when markets move fast losses pile up very quickly, and that can be positively stunning to any Forex trader regardless of his level of experience. When markets become volatile it becomes more important then ever to cut your losses short and get out as soon as your learn that your original trading plan is simply not working out. Don’t let a small loss become a big loss.
Know when to back away
There are times when the market seems to lack any kind of rational decorum or behavior. It will confound you by doing exactly the one thing that can hurt you most at any given time, and after being beaten around by it, should you decide to do the opposite of what you were doing all along, it will then reverse itself and start beating you all over again. Before you get to this point understand that is is perfectly OK, to take a step back and reassess everything. Leave the market alone for now and live to fight another day.
Position Sizes
It should have been drilled into you by your first Forex trading school teacher that when the markets get really volatile you should respond by getting smaller. Reduce your position size, and keep doing so until you are clearly playing with house money, and only then should you consider increasing your position size.
Think about using Forex currency options instead of trading the spot
We have covered the subject of Forex currency options in other articles on this site. The main advantages of them include the ability to pay one price and limit your total risk to that price. What this does is eliminate the need for stop loss orders which often get triggered soon after placement during volatile Forex trading sessions.
Avoid averaging Down
Averaging down is when you take on another identical position after the market has gone against you in order to get a better average entry price for both. There are times when this works, but volatile market conditions are not these times. It is just too dangerous a game to play at those times.
Learn to stop your way into the market
When markets start to swing wildly they tend to develop the nasty habit of disrespecting well established support and resistance lines. These lines are what you are likely to rely on as a basis for establishing good trade entry points. If the markets blow by these lines when moving against you, there is every reason to believe that you are going to get stopped out very soon after you get in, and at a price that is even worse than you could ever imagine beforehand. Using tighter stops will get you to learn quickly that this gets you out ever so much the earlier, and after a while it seems that there is nothing you can do.
Do not panic however. If you must trade these very volatile markets then let the markets tell you when to get in. You do this by setting up buy stop orders well above the current price level when you want to go long the market, and sell stop orders well below the current price when you want to go short. This has many advantages. Firstly, if the market starts to calm down what will happen is nothing and your stop entry orders will not be executed, and nothing bad can happen. If volatility picks up further then it is more likely that you will get stopped into the market going the right way. Highly volatile markets can develop a lot of momentum quickly which can take you very far, very fast and get your account fatter in a hurry. The key here is to pick an entry price level that is beyond the normal daily variance that you would expect under normal market conditions. Of course you will never catch the full move of the currency pair doing this, but that is not the idea. The idea is to catch the bulk of it in a low risk fashion.
What you really want to do with this method is make sure that you become part of any major move, up or down by automatically getting yourself into the market as things are happening. Any entry stop price that you pick must be far enough away from the present backing and filling of the market to keep you from falling for a false alarm, so practice this in a demo account and choose wisely.
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