Periods, accompanied by high variability, often entail substantial risks of Forex trading. Traders should take into account the various options of how credit leverage will affect their trades, given the fact that average daily movements increase during periods of excessive volatility. The calculation should be made at the half and one percent of the margined security for how certain levers and the size of positions will affect the trading account.
Under normal market conditions, and hoping to make up to 50 or 100 points, the most suitable would be trading positions, say two lots. With a potential loss of up to 200 points over more volatile periods, Forex risks relative to profitability are much higher. Alternatively, to compensate for increased volatility, traders should consider options for smaller trading positions. More appropriate will be one lot than the average position of two lots.
Often traders tend to believe that large fluctuations increase the probability of a stop order triggering and therefore do not consider it advisable to apply for closer stop orders in volatile markets to reduce Forex risks. However, the close location of stop orders greatly simplifies the management of the situation at a time of high variability.
For example, when trading on the EUR/USD currency pair, try placing a stop order to protect a position of 50-60 points. Such actions will provide good protection of the trading position, reducing Forex risks and in case of violation of the stop order, when the probability of the continuation of the movement is high, you can exit the market without significant losses.
In fact, the width of the stop order for each currency pair has its own, some of them have wider ranges of fluctuations. For example, for GBP/JPY or AUD/JPY, the average daily range will be 50% higher than that of EUR / USD, so it is more likely that they will have wider stop orders. But, as we have said, given the risks of Forex trading during periods of considerable variability, stop orders should not be as wide as in normal conditions. There is an option where placing a stop order 100 points below the entry level can be replaced by 75 points by lowering the stop order by 25 positions.
The charts below show the EUR/USD and GBP/JPY currency pairs for the day, which are very subject to change. The range of EUR/USD rates was about 200 points. The GBP/JPY range was even wider, at 600 points.
Very often traders in extremely volatile markets try to place the maximum number of trades, as the market is very active and it is very attractive as an opportunity to use all trading opportunities. But do not forget that Forex risks are much higher during periods of extreme variability. Therefore, when placing a trade, analyze the level of risk. Identify for yourself the extent of the risks that you are willing to take morally and financially. For example, you can trade until the recovery of the normal situation, using a different market instrument than to work on a volatile pair.
Any market situation, however, requires certain actions of the trader to meet his trading strategy. Periods of extreme market volatility require a trader to have a high level of self-discipline and endurance. It should clearly comply with all the rules relating to exit from the market, the change of scene and everything else that relates to risk management. Such actions will facilitate the task in determining such factors as Forex risks and the ability to control situations.
Reduction of Forex risks due to the knowledge of market drivers
The trader should clearly understand how the situations of the current market volatility arise and be ready to take certain actions to reduce the Forex risks. It is possible to adapt your trading tactics to the market environment, not just to a specific currency pair. First of all, it is necessary to take into account the manifestation of emotions in the market: maybe this fear leads the market down, or the bullish mood is heated by the buyer’s excitement? The emotional side and reactions of traders are indicators that lead the market to emergency situations. This fact creates variability through banal supply and demand.
Another factor affecting market volatility is economic events. Such situations allow market participants to interpret the data differently, not as trivial as most novice traders. Such an example is an ordinary monthly industrial report published in many industrialized economies.
Often the market reacts in a straight line for a certain monthly data. Very often, traders can not understand the logic of the market decline with positive indicators of production growth. And, nevertheless, the answer is very simple: due to another interpretation of the market, followed by a sharp change in the positioning of market participants. For some, this state of Affairs – exceptional trading opportunities, and for others – just catastrophic, entailing Forex risks. On the hourly chart EUR / USD below, you can see the designated entry point of the ISM production index. It notes a large price gap, which was the consequence of increased market volatility.
It is easy to identify panic in a certain market environment. Sales, under the influence of panic motives are not clear follow up and form volatile markets. Such situations lead to the fact that traders begin to change their positions intensively, and it happens that the transaction is initially correct, closes prematurely. This situation often leads to even greater panic and, as a consequence, market volatility. Traders already stop following their trading tactics and rush for some ephemeral instant profit, often guided by the desire to return the lost funds. This process continues indefinitely, and only a certain market direction can stop it.
The simple rules described by us will help, along with a General understanding of the trading atmosphere, to improve the trading strategy of the trader and reduce the risks of Forex. Very often there is a number of excellent trading opportunities that only need to be applied correctly in excessively volatile markets.
Therefore, carefully understand the essence of these rules to make it much easier to cope with situations in unstable markets, taking into account the risks of Forex. Namely: adjust credit levers to market volatility, choose a certain level of risk, apply for close stop orders, analyze and do not rush to enter into a transaction, at first glance very profitable.