How to Trade FX During Volatile Times: Opportunities and Risk Management Strategies

How to Trade FX During Volatile Times: Opportunities and Risk Management Strategies

The FX market offers several advantages over other markets during volatile trading environments

Experienced traders have learned that global financial markets oscillate between periods of low volatility and period of upper volatility. While these different volatility regimes are often specific to a particular market (stocks, bonds, commodities, FX, etc), it’s common to ascertain the magnitude of market movements impact all financial markets directly . In other words, when the stock exchange is more volatile, we frequently see bigger price swings in commodities and currencies also , given the interconnected nature of the worldwide economic system .

In higher volatility environments like we’ve seen lately, the FX market offers several advantages over other markets, but traders must practice good risk management strategies to maximize these opportunities.

First, and maybe most significantly , the FX market is that the largest financial market on the earth , with daily volume in more than $5 trillion dollars ($5,000,000,000,000). This creates unmatched liquidity, or the power to shop for or sell quickly at the present market value . When other markets experience outbreaks of volatility, liquidity often dries up, making it harder to transact at the advertised market value . For more on market liquidity and volatility, see this quick YouTube video.

Second, the FX market is open 24 hours each day , 5 days per week. These extended hours allow FX traders to enter and exit positions at any time during the week; against this , the stock and bond markets are typically closed for a minimum of two thirds of the time. Global political, economic, and social developments don’t necessarily adhere to a standard 9:00-5:00 schedule, especially when traders aren't as focused on developments in North America, therefore the ability to trade in the least hours may be a key advantage offered to FX traders relative to other markets, where participants risk being stuck in trade which will see an adverse price “gap” while markets are closed.

Finally, the FX market may be a two-way market, meaning that it’s as easy to sell any currency because it is to shop for . This advantage is especially pronounced during bear markets, when most stocks are falling together with each other , no matter the standard and long-term prospects for the firm. In those sorts of environments, it are often difficult to profitably buy any stock, whereas FX traders can more easily cash in of market trends by trading currency pairs in either direction. While it's possible to short stocks also , traders often need a special sort of account and regulatory approval to try to to so.

Regardless of which market you’re trading, there are a minimum of three major risk management considerations for trading through volatile environments:

Generally speaking, traders might want to think about decreasing their position sizes, widening out stop losses, extending profit targets, and decreasing holding periods in volatile markets. Whereas EUR/USD moved a mean of about 65-70 pips per day through 2019, an historically low volatility period, the pair saw average daily ranges in more than 150 pips through 2009, 2010, and 2011, amidst the good Financial Crisis and Sovereign Debt meltdown. If a trader developed a technique to capture the bulk of one day’s movement – say 50 pips in EUR/USD during 2019 – he or she would want to think about employing a wider stop loss and profit target and/or smaller position size when EUR/USD reverts back to moving quite 100 pips per day. additionally , certain short-term trading techniques and currency pairs could become potentially more profitable when market movements increase relative to the dimensions of the spread between buy and sell prices. Constantly monitoring market conditions and making adjustments to established strategies can allow traders to remain before the curve because the market’s volatility regime changes.

In more placid markets, traders are less likely to experience “slippage” on market orders, where the trade executes at a special price than anticipated. However, when markets are more volatile, it becomes much more important to utilize stop and limit orders to make sure that trades are executed at the intended price. Though it are often more work, diligent order entry allows traders to take care of favorable risk/reward ratios no matter how briskly markets are moving.

A full examination of trading and risk management strategies through different market environments is beyond the scope of this text , but readers are encouraged to explore the education section of our website and our “Foundations of Forex Trading” webinar series for more actionable insights.

The sheer size, trading hours, and two-way nature of the FX market make it particularly attractive to traders, and by tweaking their strategies, understanding order types, and continuing to find out , traders can maximize their chances of successfully navigating volatile market environments.