As you may already know, in the world of trading, uncertainty is the only certainty there is, especially if you trade in highly volatile markets. The constant price fluctuations driven by the wide range of factors that influence each market make it virtually impossible to predict how things are going to evolve in the short or long term. While some assets are more likely to experience sharp price swings than others, volatility is a common denominator for all financial markets, whether we’re talking about stocks, bonds, foreign exchange, physical assets, or commodities.
It’s understandable why volatility has gained negative connotations, often times being associated with fear and seen as a necessary evil that scares newbie traders away and even cuts their trading dreams short. However, volatility is not the enemy. In fact, it’s quite the opposite. If market volatility didn’t exist, you wouldn’t be able to make a profit. Increased volatility provides the possibility of larger gains, particularly in short-term trades. On the flip side, high volatility also translates into higher risks and can lead to substantial losses.
That’s why one of the key skills in trading is learning how to manage volatility and striking a balance between risks and returns. So, even though volatility may be scary at times, with the right approach, you can make it work for you, not against you and reduce risks considerably.
What you need to know about volatility
Knowledge is power when it comes to dealing with volatile markets. The more you know about this topic, the better equipped you’ll be to handle the risks of volatility. In trading, volatility can be defined as a statistical metric that measures the rate of price variations of a specific asset over a certain period of time. All asset classes include some degree of volatility, but sharper and more frequent price fluctuations characterise highly volatile markets.
Although it’s rather difficult to assess the risks associated with trading, volatility can be measured by standard deviations, which refer to how much prices move away from the average or expected price. When market volatility increases, one can expect wide-ranging prices, a higher volume of trades, and greater gains and losses, as well as traders moving in the direction of long-term trends.
There are many factors that influence and increase market volatility, such as political and economic events, technological developments, corporate performance, and so on. However, it’s not these factors that drive changes directly, but rather the emotional response they elicit in traders. A lot of traders tend to get carried away by their emotions, with fear, anxiety and greed being the main actors that lead to poor trading decisions and further fuel volatility.
The risk of leveraged trading
Leverage can be a very powerful instrument for traders, especially when trading CFDs, as this provides access to larger positions and greater exposure to the market with a small amount of capital. CDFs are also said to be a great tool for diversifying your positions in times of increased volatility.
However, there are two sides to the story here. While leveraged trading can amplify your returns if your predictions are accurate, it can do the same with losses if the market doesn’t move the way you expected. Besides, there are also fees and margin rates to take into account before getting started. Therefore, leverage must be used cautiously and sensibly since both gains and losses can be magnified. Being aware of the risks you expose yourself to and having a strategy in place is a must when trading with leverage.
Also, since no two trading platforms are the same, researching different networks and learning about the features they provide, as well as the fees and costs they incur, is just as important. For example, on MetaTrader 4, you can trade CFDs on over 170 forex pairs, plus all the key indices and commodities – you can read more about MetaTrader 4 here.
How to stay safe in a volatile market
When handled properly, volatility can turn from foe to friend, so here are a few strategies that can help you stay on the safe side.
Assess the risks
Risks are a given with all trades. Since you can’t remove them from the equation, the wisest thing you can do is get to know them closely. Analysing every possible outcome of every move you intend to make eliminates the element of surprise and reduces risks to a minimum. If a trade seems too risky, it’s best to prioritize certainty and safety over the possibility of high returns.
Know your orders
Another way to reduce risks and limit losses is to use certain types of orders in your trading. A stop-loss is, just as the name suggests, a tactic to reduce potential losses by setting a particular price point for selling or buying an asset, so you basically get to decide the amount of risk you’re willing to take on. Take-profit limit orders can also be efficient in this respect, triggering a limit order in place when a predetermined profit level is reached.
Have a plan and stick to it
Volatile markets can cause you to make hasty decisions that you may come to regret later. However, that’s less likely to happen if you have a tried and tested trading strategy in place that also includes guidelines and rules on what to do in times of great volatility. Following these strategies will protect you against erratic movements and poor trading decisions.
Keep your emotions in check
Emotions have no place in trading. Basing your decisions on a moment’s whim or wishful thinking instead of listening to the voice of reason can only lead to negative outcomes. That’s why it’s important to exercise self-control and practice patience and discipline while trading.
Stay in the know
Trading is a complex endeavour, so no matter how much knowledge or experience you have gained in the field, there’s always room for improvement. Fortunately, there are plenty of resources that can help you expand your skills and stay up to date with the latest developments in the markets you’re interested in.
Disclaimer:
Spread bets and CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. The vast majority of retail client accounts lose money when spread betting and/or trading CFDs. You should consider whether you understand how spread bets and CFDs work and whether you can afford to take the high risk of losing your money.
