With Wall Street’s fear gauge hitting its highest level since the pandemic, we could see another major spike in market volatility.
Here are some adjustments you can make.
What are volatility anyway?
Volatility refers to the amount of fluctuation in the price of an asset over a period of time. It is measured by taking the standard deviation or variance of price changes over a specified period of time.
Wow, that’s a lot of financial gibberish!
Simply put, volatility measures how volatile the markets are.
Newscasts in a non-volatile market environment are like regular weather reports. Some may not like it, but you won’t see blood on the streets because of it.
On the other hand, a volatile market environment means that positive and negative price reactions are likely to multiply.
So how can you prepare your trading plans for this?
1. Sharpen your trading focus
As the British say, keep calm and carry on. Perhaps the worst way to deal with potentially higher levels of market anxiety is to become increasingly anxious too.
Remember, the high volatility makes it extremely important to maintain a focused mindset and control your emotions.
Remind yourself to stay calm even if the price action becomes very stressful, and focus on your trading plan instead of panicking when you see sudden moves in the market.
This can help you keep a clear mind as you evaluate any new triggers that arise and then adjust your attitudes accordingly.
2. Set your stops and goals.
Placing tight stops in a volatile trading environment can end up doing more harm than good. After all, forex pairs can quickly rally to these exit levels before your trade is headed your way.
This must be frustrating, right?
To determine how much freedom you should add, start by observing changes in price action over the course of the trading day. From there, you can make necessary adjustments to your stop loss and profit targets.
If you are looking for some historical data on volatility and average point movements for each pair, Milk market I’ve got you covered!
3. Change your trading style
Having a specific strategy for limited days of low volatility or a trending environment gives you the flexibility to adapt to different market conditions.
In particular, switching from longer-term to shorter-term settings during more volatile situations may be to your advantage. You may not want to keep positions open for too long, especially since a price spike may occur before you realize it.
4. Sit on the sidelines
There is no shame in abstaining from making any trades during volatile market times!
Deciding not to take a particular trade setup or to stay out of the market altogether is a valid risk management decision in itself.
Instead, remind yourself that there will always be other (and possibly better!) trading opportunities later.
There is no need to chase big price movements if you are not confident about them or if your instinct is telling you to wait. If you do not have a clear plan for dealing with a volatile market scenario, you may save yourself potential losses by sitting back without taking any action.