Published On: Mon, Dec 10th, 2012

How To Combat Forex Volatility

The degree by which price fluctuates is called volatility. Currency pairs tend to oscillate over a much larger range at a faster pace when volatility is high. Forex experiences such conditions only about 30% of the time, but when it does it can produce very vicious price movements and spikes.

As good practice, you should always adhere to your trading strategy regardless of market conditions. You should, however, enforce this concept even more during times of high volatility. You must try to temper your emotions as a priority. Increased levels of Forex volatility will pressurize you and your best defense will be to stick to the concepts of your trading strategy.

You must be aware that Forex can generate such extreme conditions that it can render standard trading techniques practically redundant. You must exercise increased control over your emotions during these times. The effects of volatility can also be amplified by undisciplined use of the high leverage facilities available on Forex. To counter all these problems, you must learn how to survive volatile conditions as a priority. Here are some guidelines to help you do just that.

1.  You need a professional and well-developed trading psychology in order to keep your emotions under check. Your moods can have a serious effect on your ability to trade Forex. For instance, during volatile times you will have to acknowledge your mistakes more quickly otherwise any delays could create serious fiscal losses for you.

2.  In addition, you must make sure that your wins do not make you become overconfident and start over-trading. You must remain totally objective at all times. Sometimes the market’s patterns can be so violent and random that they will keep stopping you out no matter what you try. Under these circumstances, you are well-advised to step-back from your trading and await calmer more predictable trading days.

3.  You must employ maximum use of your money management and risk strategies during volatile trading because they may just save your account. When price fluctuates faster and over a larger range, you are well-advised to open new positions using smaller lot sizes. You could still make the same profit because the larger price movements will counter the smaller lot sizes.

4.  In addition, you need to take extra care with your stop-losses when Forex is volatile. Price fluctuation can quickly knock-out your stops so you must calculate sensible sizes backed by the use of smaller lots. Use your stop-loss and position size to ensure that you always keep your risk at 2% or lower for every trade you enter.

5.  When price does move in your preferred direction creating you a profit, then do not hesitate to move your stop and lock-in some of your gains. You need to deploy every little advantage that you can during volatile times. You may be able to achieve more gains than losses if you lock-in your profits at every opportunity that is presented to you.

Protect your account at all times under these difficult trading conditions. Your best policy is a very conservative one reducing your risk exposure to a minimum. Unwise use of leverage in a volatile market can simply demolish your account balance. This is because Forex has a highly volatile nature in general. If you combine this feature with the high leverage facilities provided by most brokers, then you have an environment capable of wiping out your entire account in a short time. To overcome this massive problem, you need to base your trading strategy on psychology, risk management and the mistakes to be avoided.

You must always enter new trades with well-positioned stop-losses otherwise the results can be disastrous if you have just calculated profit targets only. You must learn to proceed with extreme caution and follow your money management strategy otherwise just one trade without a carefully placed stop loss could cost you your entire account.

You will always know when to exit a trade should price turn against you and when to let your profits run if you always use pre-determined profit targets and stop-losses. If you achieve a winning streak, then you must still be careful. If you do not, then you could become over-confident and start over-trading. This mindset will make you start exposing large portions of your entire account to unacceptable levels of risks.

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About the Author

- Marcus Holland has been trading the financial markets since 2007 with a particular focus on soft commodities. He graduated in 2004 from the University of Plymouth with a BA (Hons) in Business and Finance.