Trade Safely in High Volatility: Oil, Gold & Forex Tips
Volatile financial markets can be challenging. When prices move sharply higher or lower, it can be difficult for traders to assess what is happening.
There can be sudden and substantial fluctuations, from oil and gold to cryptocurrencies like Bitcoin to forex markets. On the one hand, volatility offers opportunities.
On the other hand, volatility can increase risk. By following some basic rules, however, you can trade with greater confidence in volatile markets.
How to trade during high volatility
This guide will teach you how to trade high volatility featuring examples from US and European markets. We will discuss various asset classes and risk-management issues to help you evaluate potential gains and risks during high volatility.
Step 1: Understand High Volatility
High volatility typically signifies sudden, unexpected market moves in financial markets, often as a result of geopolitical events, economic data releases, or changes in sentiment among market participants.
In early 2022, oil prices rose sharply as a result of supply disruptions relating to geopolitical tensions between Russia and Ukraine. Oil prices jumped from around $80 per barrel to more than $120, giving rise to high volatility in energy markets.
Likewise, Bitcoin has gone through several high-volatility phases. In late 2021, it briefly hit an all-time high of close to $69,000, going on to lose more than half its value in the following months.
Forex markets can show high volatility. In March 2020, as the COVID-19 pandemic led to a global sell-off, the euro and US dollar saw large swings in prices because of a lack of clarity and panic.
Understanding what’s behind these moves in markets is key to figuring out how to tactically manage volatility.
Step 2: Forex High Volatility and Major Market Examples
The forex market, which is arguably the most liquid financial market in the world, can also be extremely volatile when major currencies such as the US dollar, the euro, and the British pound are involved. For example, following the Brexit vote on 23 June 2023, the British pound suffered sharp falls, plummeting by more than 10% against the US dollar in a single day.
And this is just what happened to the pound on a normal weekday. Imagine what would happen on a Friday afternoon, just before a long weekend. The result would resemble a financial tsunami, affecting retail and institutional traders around the world.
Likewise, in 2022, as US inflation fears increased, the Federal Reserve’s interest-rate hikes caused wild swings in the dollar’s value relative to other currencies. After surging to parity with the greenback, for instance, the euro demonstrated the effects of economic policy on forex volatility.
You need to be on top of your economic indicators and the actions of Central Banks to trade forex when such volatility strikes. And then, even though there is a lot of movement, you can still get caught if you do not get out in time, as price swings can be two-way, and you can wipe out your gains or pile on losses.
Step 3: Diversify into Multiple Asset Classes
The best way to deal with the increased risk during high volatility is to simply diversify. If you spread your trade between different asset classes such as commodities, stocks, cryptocurrencies, and forex, your portfolio will be less affected by the volatility of each market.
For instance, you might own some Bitcoin and other cryptocurrencies, where your digital assets could swing wildly, but you can hedge against this volatility by holding gold, which is a safe haven when economies are in flux. In March 2020, although global stock markets were crashing amid the COVID-19 pandemic, gold prices surged as they sought a store of value.
But diversification is insurance against bad events, not against disaster. Sure, spreading your money across multiple trades allows you to withstand the craziness of a single market, but what diversification doesn’t protect against is the possibility of multiple markets moving together during times of extreme market stress.
Step 4: Use Technical Analysis for Entry and Exit Points
Technical analysis is an important tool that is used by traders in volatile markets. Indicators such as moving averages, Bollinger Bands, and the relative strength index (RSI) are used by traders to time entry and exit points as well as make decisions on managing risk.
For example:
– Moving Averages: These smoothen the price action and can help the trader discern the direction of the trend. When the foreign exchange market is volatile, as it was during the euro’s wild swings against the dollar, they can filter out the noise and help the decision-making process.
– Bollinger Bands: these measure the distance of the current price from its average, indicating overbought or oversold conditions. In other words, they tell you just how outlandish a given price level looks. At the times when Bitcoin’s price was surging or crashing down, Bollinger Bands have given traders a heads-up about possible reversals.
Yet every now and then, technical analysis does work: prices can change direction quite quickly, and the sentiment of the market can swing one way or the other in unexpected ways.
Step 5: Manage Risk with Stop-Loss Orders and Position Sizing
Since volatility increases the chance of a market shock such as a sudden reversal, risk management is especially important. Stop-loss orders and position sizing are two trade strategies used to mitigate the effects of volatility.
– Stop-Loss Orders: This order sells your asset when its price reaches a designated point that you set in advance. Your potential losses are thus limited. For example, when oil prices briefly became negative in0 due to the collapse in demand during the pandemic, traders who had set a stop-loss order exited their positions before losses became crushing.
– Position sizing: Putting only a reasonable fraction of your capital at risk on each position can help to mitigate the impact of the worst price moves, especially in highly volatile environments. If your capital is $1000, and you risk only 2% on each forex trade, a blow-up can still only cost you $,000.
Those are your capital, but they don’t eliminate risk. Rapid market moves can cause prices to ‘gap’, meaning that stop‑loss orders might not be filled at the price you set and can lead to losses greater than your stop‑loss level.
Step 6: Monitor Market Sentiment during high volatility
Sentiment is a key ingredient of volatility, and during periods of uncertainty, anecdotal news coverage and social media hype can have a significant effect on traders’ moods and their inclination to buy or sell. So it was that early in 2021, as snippets of dogecoin gossip circulated on Twitter and Reddit, retailers channeled their energy into cryptocurrency assets, causing dogecoin and Bitcoin to soar by more than a period of a few hours. In forex, sentiment is another factor that can generate abrupt movements in the currency markets. Take the dollar, which can appreciate sharply at times of global uncertainty.
Factors such as the Volatility Index (VIX) for the stock market, or news events that influence market psychology, can help traders forecast prices on sentiment, which is even more precarious than fundamental analysis because markets can reverse direction quickly when new information or events surprise traders.
Step 7: Be Prepared for Market Reversals in times of high volatility
Another problem with high volatility is the risk that markets will undergo sharp reversals. For example, in late 2021, the price of Bitcoin rose to almost $69,000 and then fell by more than 50% over the next few months. Likewise, following the Brexit vote, the British pound dropped but then rallied back and largely recouped losses over the next few months.
To mitigate this risk, traders can utilize tools such as trailing stop orders to lock in profits and reduce their downside while accounting for price movements. Technical analysis can further help by identifying levels of support and resistance that are likely to result in a price reversal.
Step 8: Use VPTrade for Comprehensive Tools and Support
When you trade in volatile markets, you need a trading platform that can support you to the fullest. That’s why VPTrade is the right place for you. Whether it is technical analysis tools or risk management features, VPTrade has all the bells and whistles a savvy trader would need to manage their trades in volatile markets. For example, VPTrade provides real-time charts, technical analysis tools, and risk management tools such as stop-loss orders and take-profit orders.
VPTrade also includes educational content, such as webinars and market analysis about the impact of volatility on different asset classes. These tools can be helpful, but there is no platform or tool that can mitigate the risks of trading in a high-volatility environment, especially as results depend on the strategy and risk management approach used.
Step 9: Practice with a Demo Account
A demo account could be of great value to a beginner in high-volatility trading, as well as for testing strategies. For example, VPTrade offers a demo account for traders that trade on real market conditions but without having to risk real money. VPTrade’s demo account could be an excellent choice for practicing and refining strategies before trading real money, especially on high volatility assets like forex, oil, or cryptocurrencies.
It also helps the trader to get a feel for how the markets work and how to manage risk more effectively through the use of a demo account before committing his capital.
Step 10: Balance Potential Gains with Risks
Trading in high-volatility environments can reap financially lucrative rewards but it comes with a high cost. Market spikes and crashes can create opportunities for massive profits but also huge losses, as anyone who long oil before the 2020 crash learned, as well as the traders who didn’t manage risk during the 2021 crash in Bitcoin.
And that’s the healthy way to view high-volatility markets; there are rewards to be had but there are also risks to be managed if you want to be a successful participant in the long run.
Whether you are trading forex, oil, gold, or Bitcoin, it could be said that all the action happens in high volatility.
Those who understand the dynamics of the market, place their stop-loss orders, and learn to size their positions correctly – while also learning to use technical analysis tools to their advantage – stand a chance of making good trades when the markets are in a time of volatility.
Volatile markets are all about speed. Whether you are a day-trader, a swing trader, or an , having the right tools and the ability to take your signals from charts with accuracy and speed could be the key to surviving and thriving in these challenging environments. VPTrade provides the tools and advice you need to make the right decisions in volatile markets, but remember, all trading involves risk. A balanced approach to your trading, combining your education and training, how you practise and the discipline you apply to your risk management, is the key to success.
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