How to earn on volatility
How to earn on volatility?
We have been dealing with financial markets for many years, and there is no doubt that volatility is a phenomenon that can cause many problems for traders, and those who begin even to discourage Forex. The foreign exchange market can sometimes behave steadily for weeks and months and then move hundreds of pips in several hours. There are two types of volatility, historical and implicit. Historical volatility is normal price behavior over a certain period of time. On the other hand, the current and future price behavior, which is abnormal, is called implicit, and if we compare it with historical price behavior, it usually goes beyond the historical framework. And precisely on this type of volatility we will focus here and show how to benefit from large and unpredictable fluctuations.
Extend values for Stop Loss and Take Profit commands
The most logical thing to do if the market shakes is to extend the values of Stop Loss and Take Profit. There are three types of price behaviors during uncertain times: a volatile market can jump hundreds of pips in one direction without looking back, can move hundreds of pips with variable price behavior, with pronounced returns after each turn between turns, can fast moving up and down to a certain extent For all these types of volatile markets, it is best to extend the goals for Stop Loss and Take Profit. This prevents upsurge, which minimizes your losses and increases profits by expanding the potential for profit.
Sometimes, if the market is unstable, the big moves and the pricing behavior variable, then it makes sense to use small ‘Stop Loss’ and large ‘Take Pofit’ commands. This technique usually provides the best results if used for outdated markets. It looks like the opposite of the above-mentioned technique for spreading values, but this strategy works. If the price determines the extent of the trades, it is necessary to set ‘Stop Loss’ just above the upper limit (at the sale) and below the lower limit on purchase. You never know when the price will exceed the upper limit value and how far it will get. In these situations, it is better to set a tight stopwatch. Do you remember when the currency pair of EURUSD was traded between 1.05 and 1.1050 after the FED meeting in May? The fluctuations varied from 400 to 500 pips in both directions, later breaking the upper limit and jumping to 1.1350. If you placed 100, 200 or 300 pips in the upper limit, you could end up with a big loss after breaking.
The use of leverage to generate large profits is very popular with traders with limited equity. However, the leverage effect is also one of the foremost forex accounts killers, especially in times of high volatility. So, if you extend Stop Loss values for volatile currency pairs, make sure you restrict the financial leverage to such an amount that the risk level remains the same as at more constant times. For example, when the Chinese stock market fell, some pairs of currencies moved up to 600 pips in a few hours. After the first drop of 200 pips, we decided to take a long position with the pair USDJPY. We started buying with a goal of 300 pips for both Stop Loss and Take Profit. However, we did not expect this pair to fall by another 400 pips, which would use a 3% leverage to 30 pips stop loss to mean that we lose 30% of our account on a single trade. Instead, we reduced the leverage from 1:10 to 1: 2 and lost 2% of the account. Fortunately, this loss was succeeded by another purchase, but if we lost 30% of the bill, it is likely that we would not even be able to open this rescue position.
Diversify your portfolio
Diversifying your portfolio is one of the main techniques for ending long-term volatility. Large institutions are always diversifying their portfolios with many resources in many different markets. The more volatility in the financial markets, the greater the uncertainty, and therefore it is important to distract your finances into different pairs and directions. This reduces your risk and often makes a profit. This strategy becomes more profitable if the price is variable. Selling a pair of EURUSD during a fall and buying AUDUSD on a rally is the path in the right direction. In the worst case, you can only insure your profitable business, so you will not be at a loss. If you apply this technique to a few couples, some will surely make a profit, while others will end up without profit or loss.
Extend the time slot
The volatile and volatile market often gives the impression that it moves around without a clear direction, and in many it raises embarrassment. Therefore, it is better to look in greater depth to avoid noise in smaller time frames. You can see more important levels of support and resistence of higher time frames, which stops you from over-trading in smaller time segments. Closing too many deals is as risky as volatile markets in volatile markets. If you open too many positions, you can not concentrate and take care of all your business. Therefore, it is better to stop and monitor the market on the charts over a longer time frame so you can choose the best entry points.
Patience brings roses.
And that’s exactly what’s true about trading on volatile financial markets. So, choose important levels in the chart with a longer time span, wait until the price rises and then hit. And do not forget to leave as soon as you make enough of your business.
If you have any doubts, stay behind
Forex often offers many temptations, but it is important not to drop into everything. It is not possible to pick up each pip, moving the price up or down. You trade only if you are confident that the purchase can make a profit. Otherwise, it is better to withdraw and only watch until the right opportunity comes.