Volatility is the rate of the currency pairs when it fluctuates after some time. During high volatility, you will see that currency pairs move a lot faster. In the Forex market, the volatility is very high, reaching about 30%, and produces a huge spike of prices throughout these periods.
Trading When The Volatility is High
It is advisable to adhere to your strategies in Forex all the time, much more during periods of volatility. This is because, when the volatility is high, there are vicious and rapid price movements. During these times, even the slightest emotional decision that you make could interfere with your original trading plan. Your major priority should be controlling and lowering your risks since the pressure intensifies during these conditions. But if you choose to be strict with yourself and maintain discipline, you will most likely get overwhelmed with all these events which could then result in grave financial losses.
But there is still a way to remain firm amidst volatility. One thing you can do is keep your focus on the main elements that compose your trading strategy. Things like money management, contingency plans, and risk management should shield you from the effects of volatility. For instance, you may use tighter stops to be able to reduce further finances. This strategy should be maintained and should never be entangled with emotions.
Another effective strategy is using smaller stops combined with smaller lot sizes. Aiming for not more than 1% of the risk out of your overall budget during volatile times is not bad. Even with it, you can still acquire a good amount of profit since your wins could still appear to be greater due to the increase in the price movement.
Managing Your Risks
One of the first things that you need to mind is the risks. This matter should hold the topmost priority in any kind of trading environment out there. Because, if you fail to manage your risks, you will lose all the money in your account and you will go broke. For this reason, managing your risks should be your first consideration when you put your money to work.
If the time comes and the market becomes more volatile, you will find it very important to increase the protection that you have on your risks. That’s the time when you need to consider your trade size. For most traders, during the most volatile situations, the best thing to do is to cut small trading positions. This means that if you are usually trading 0.5 lots, you may reduce it to 0.25 lots due to the market risks that move rapidly.
If your risk managers force you to cut down our positions, you must understand them as this is merely for your own good. Due to this matter, those professional traders are trading with less leverage compared to those retail traders. Nowadays, it is very uncommon to see a professional trader utilizing 1:7 leverage. But instead, they are using 1:20, something that a bunch of retail traders mostly use.