An experienced forex trader should be able to trade swiftly in volatile markets. However, whenever there is a hint of market volatility, many traders are frustrated during such times. So, how exactly should a trader react to market volatility when trading forex? Well, the first thing is to understand market volatility.
What causes market volatility
Here are some of the top factors that cause changes in the forex market that may lead to volatility:
The forex market reacts differently whenever there is an economic crisis. For example, during the Covid-19 pandemic, there was market instability triggered by the economic crisis. In such cases, the forex market is affected, and traders need to be aware of this factor.
Politics and the economy are intertwined. Any major political development will always influence the financial markets. You will often notice market volatility whenever there is an upcoming election in the world’s largest economies, such as the USA.
Changes in national economic policies
The monetary policies of the biggest economies in the world may influence the financial markets. When the policy made affects the financial market hugely, then there is a likelihood that there will be market volatility.
Tips for trading forex in volatile markets
Now that you already know how to identify a volatile market, using the following tips can be helpful in maneuvering through the hostility of the financial markets when trading in established platforms such as Metatrader 4, commonly known as MT4.
1. Use less leverage
Losses can be extremely traumatic during high market volatility. Reducing leverage is one of the ways that investors can lower the risks of losing money. To reduce massive loss, traders should reassess their risk to reward ratio. Using a single lot is advised as opposed to 2 lot positions.
2. Be more selective
It is important to assess risk tolerance before placing trades. Traders should think through the trade before they decide to execute. The risk of losing money in a volatile market is very high, thus, the importance of being selective is paramount.
3. Tighten stops
There are many advantages of trading with tightened stops during market volatility. It improves your risk-reward ratio, minimizes losses, and helps improves profits if you can do it correctly.
4. Trade with more discipline
When the market is volatile, you need to trade with more discipline than before. This is because sobriety is needed to make decisions on the go. More than ever, a volatile market requires traders to avoid being emotional.
5. Be prepared
Anything can happen in a volatile market. Therefore, you should be expecting to face any kind of scenario when trading forex in a volatile market. You should have a strategy that you stick to and watch without being too emotional.
Is making money possible in a volatile market?
The concept of volatility works both ways. A trader can make both profits or losses depending on their actions. Therefore, the right strategies can get you to winning ways.