How to Deal with Uncertainty and Volatility as a Day Trader

How to Deal with Uncertainty and Volatility as a Day Trader

Dealing With Uncertainty And Volatility As Day Trader

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CBOE Volatlity Index and the EURUSD

Seasoned investors and traders are certain of two things in the financial market: uncertainty and volatility. It is during these two extreme times that traders make most money. It is at these times too that most people lose a lot of cash. Trading a normal market without the macroeconomic data would not be as interesting as it is today when market moving information is released on a daily basis. The anticipation of what the data will bring leads to uncertainty and volatility. For instance, many analysts expect the fed to raise interest rates in September. Towards this period, the amount of volatility and uncertainty will be high because no one is certain enough whether the tightening will happen. Earlier this year, the ECB rolled out its Quantitative Easing (QE) program. Before that, the volatility index was at its peak because people were uncertain on the program. Therefore, as a trader, it is important to understand the strategies of navigating the uncertain and volatile market.

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The United states Dollar Index

No one really knows

Ideally, on a daily basis, you will hear from the crème-de-la-crème of the financial industry. Analysts from Goldman Sachs, Morgan Stanley and City will be in the leading broadcasts (Bloomberg and CNBC) discussing the macro trends of the day. As a trader, the best thing to do is to listen to what these guys are saying but make your own independent decisions. The fact is that these guys are always wrong. For instance, only a very few analysts such as Meredith Whitney and billionaire Ray Dalio accurately predicted the 2008 financial crash. Before the crash, leading analysts were all over saying how good the economy was. Again, no single analyst saw the oil crash that is currently happening. In fact, in May, analysts from Barclays and Goldman Sachs stated that oil was going to $30 per barrel. Again, earlier this year when the SNB (Swiss National Bank) removed the currency peg, no analyst was on record to having predicted that. Therefore, as a day trader, always make your own independent research and allocate capital bearing in mind the risks involved.

Trade few instruments

As a trader, the biggest risk you can put to yourself is trading many instruments. Big banks and hedge fund managers have achieved a lot by understanding that excessive diversification will lead to minimal returns. For instance, banks such as Goldman Sachs have thousands of employees in their trading department. These employees are divided to focus on specific core instruments. For instance, there are those people who deal with currency and others who deal with commodities. As a day trader, the best thing you can do is to trade on 1 or two instruments. For instance, you can focus on the EURUSD pair alone. You can also focus on gold. Your end will come the point you start trading many currency pairs and commodities per day.

The fact is that it is possible to make a lot of money by trading a single pair. The beauty of doing this is that it will be easy to internalize and predict data. For instance, assume that you are trading the EUR, USA, CAD, JPY, and Gold. It will be very difficult for you to stay on top of your game.

Risk Analysis

Day trading is usually very risky and people have lost a lot of cash. The problem with many day traders is that they don’t take time to perform risk analysis before they allocate their capital. Risk analysis involves using mathematical tools to establish the amount of money you are willing to risk per trade. One way to protect your finances is to use a stop loss and a take profit. When using a stop loss your trade will stop immediately the point where excess losses are made. Ignoring a stop loss is common especially for traders in denial. They hope that the market will suddenly come up in their favour. Unfortunately, this rarely happens and they before they realize it, it is too late.

The Noise Makers

As a day trader, you should always be aware of the noise makers in the financial market. These noisemakers are the ones which bring volatility and uncertainty in the market. Market and economic data are the most common noisemakers. To stay ahead of the game, I recommend that you download mobile applications such as one from Investing.com, Bloomberg and Market Watch. Also, if possible, I recommend that you watch Bloomberg TV and CNBC to get information as it arrives. The economic calendar will help you anticipate the market reaction and know when to trade and when not to trade.

The market will always remain volatile and uncertain. Successful traders have always known this and use it to their advantage. As a new trader, mastering the art of financial analysis will help you navigate risks and allocate resources in the best way possible.