Whiteboard Wednesday - 5 Golden Rules For Trading In Volatile Markets

By GKFX Team  |  22/03/2017 10:38

1. Short term pull backs
In volatile markets look for short-term pullbacks from trends in order to enter the market, this will give you a better opportunity of entry before the inevitable turnaround markets give you.

2. Reduce position size
Volatile markets mean that there are more moves than you would usually see. In this type of situation, it is good practice to reduce your position size before you enter the market. The market volatility will mean that there is more risk to your position quickly going offside, so limit that risk by taking smaller positions.

3. Give your stops breathing space
It is best practice to always give the market breathing space around your stop and limit orders. Placing a stop too close to the market prices is the quickest way to lose money, make sure you give the market room to breathe and move. Remember volatile markets will mean the market is more erratic and more likely to take tighter stops out more quickly.

4. Take profits
It’s hard to make money while trading, so make sure you take some off the table if they are available. Don’t be greedy, remember you can partially close a position and leave the rest running if you still believe there is more to come.

5. You Don’t Always Have to Trade
Sometimes the most profitable trade is the one you decide not to make. In volatile markets you have to be quick to get in, but if you miss it don’t force a position and get in too late. You don’t have to always be in a trade.

Video Transcript:

Hello and welcome to Whiteboard Wednesday, today we're going to be looking at 5 golden rules for trading during volatile markets. Now, markets at the moment are incredibly volatile, we've got headlines coming from the US, the FED, the White House, the new President Donald Trump and Brexit. So with all of those headlines coming out and all of those big news stories, it's no surprise that we've seen very volatile markets, not just in equities but in currencies and commodities. So, let's look at 5 golden rules to stick to when we look to trade in those markets.

Number 1: Looking for short-term pullbacks. Now, within the markets, if we go back to when we saw the EU referendum and its effects on the pound, we saw huge falls and movements in the market over that time. That continued down for a long period of time and it always becomes very difficult to think when we can get into the market, when to place your trade, when to enter. That's a key reason for looking at pullbacks in the market to help you. When the market's rising, you're looking for pullbacks on the downside and when the market's going down, you're looking for pullbacks on the upside. It depends which way you're going, whether it's a long or short position, so it's very important to look at those short-term moves against the trend and use those as your key entry points into the market, and that always works very well within volatile markets like we have at the moment in the Pound and around those Brexit headlines. 

Number 2: Reduce your position size. Now, if we look at how markets have been trading, it's clear that volatility is everywhere. In the currency markets, yes we have much volatility and there's always volatility within Forex markets, however, the extreme volatility we have at the moment means that it can be that little bit more risky when placing your trade. So, also use other risk management tool risk stop losses and limit orders but also reduce that position size. If markets are incredibly volatile and you're seeing big movements in the market, it's very important to make sure that you're not necessarily taking on those larger positions because, naturally, those markets can move a lot quicker meaning you can lose money on your positions more frequently. So, to get around that, trade those slightly smaller positions in order to help your positions to last longer, if they move against you.

Number 3: Give your stops breathing space. Stops, limits and risk management tools are so important in trading, especially stop losses, but placing stops too close to your entry point will likely cause you issues, particularly in volatile markets because that means the markets are whipping back and forth. We can see those exact same situations in the US markets at the moment; just this week, we've seen the first 1% fall in the DOW Jones for over 5 months. So, with that in mind, giving your stops that breathing space is incredibly important because it'll help you to stay in those positions for longer. Of course, make sure it ties in with your risk/trading strategy, but try to give your stops that few more pips' breathing space; look for your support/resistance levels and put them slightly above/below those lines. Give the market room to breathe and it'll make those positions last a little bit longer.

Number 4: Take your profits. This is really important, and a lot of people get greedy when a market is going their way, so make sure you take profits off the table. This doesn't mean you have to close your position entirely. Again, since Trump's election, we've seen markets rallying incredibly strongly. They've rallied pretty much since that day up until last week. And during that time there's been plenty of opportunity for people to take some of that profit off the table, yet still run that position a little bit higher. If you're long of the market, say, the DOW Jones, and the market is moving to the upside, there's nothing wrong with closing some of that position and allowing it to run a little bit higher, but remember to place those stops and give them some breathing space underneath. Use all of these things as part of a risk management in your strategy and it'll make things a lot easier for you going forward.

Number 5:  This isn't just important to use during a volatile market, but during all trading. You don't always have to be in the trade. Sometimes the most profitable trade to place is the trade you decide not to place. You don't always have to be in the markets; new traders often think they have to always place a trade, if they're in a EURUSD trade and Brexit headlines come out and move the markets, they think they have to instantly get back into them. This isn't always the case, similarly if a trade goes well and hits your target, you don't have to instantly get back in again. Take some time to think about your strategy and then get back into the market; don't force your way into the market because that's the fastest way to make a loss.