How to Trade in Periods of High Volatility – Introduction
In the financial markets, one thing is often certain: uncertainty. No one knows what will happen in future. Even the so-called experts usually don’t have a clue. For instance, Mohammed El-Erian, who is the head economist at Allianz and a common feature in financial news has been talking of a financial crisis for years. Jeffrey Gundlach who is the current bond king has appeared on television for years warning of a coming collapse. Yet this has not happened. I can go on and on. The fact is that the financial market is uncertain and no one knows about the future. Volatility is an important aspect of the financial market. Some traders love trading in periods of high volatility while others like the opposite.
Last week, the United States fired missiles in Syria. During the weekend, it was reported that the U.S Navy ships were heading to the Korean Peninsula. All these are major causes of volatility in the market because no one knows what will happen in the future. A week ago, no one expected that these two geopolitical events would happen. How then do you as a trader trade in such periods?
- Expect the unexpected
The first thing you need to do is to always expect the unexpected. Even when the markets seem calm, always expect the unexpected to happen. Remember that anything can happen within less than a second in the financial market. Therefore, in every trade that you open, always expect the unexpected no matter what kind of analysis you did.
- Protect your trades
This follows the above point. As you expect the unexpected, you should do the best you can to protect your trades. This means that you should do two things. First, you should place trades that are not very aggressive. The lot size that you select should be relatively small. This ensures that the maximum loss you can make is small as well. Second, you should ensure that you have a stop loss in all trades that you open. As I mentioned, a microsecond can be the difference between you and success.
- Overnight trades
I have never been a fan of overnight trades. This is because so much happens at night that could have implications on your trades. Remember, when the markets are closed in the United States, they are usually open in Asia. This means that Japan or China can do something that can move the market. For instance, last week’s strikes happened when the markets in the US were closed. Therefore, do whatever you can to avoid overnight trades.
- Be informed
It is very important to be informed about what is happening around the world especially when you have open trades. Before you open a trade, you should always look at the economic calendar. This will prepare you on what to expect if data is released. As a rule, I always stay out of the market a few hours before data is released. When you have a trade open, you should be informed of what is going on. The best way to do this is to have financial TV on. You should also have financial apps with their notifications on. This will update you when anything significant happens. Finally, you should monitor the VIX index. This is known as the fear index. It is the index that people in Wall Street track to know the nature of the volatility in the market. If it’s very high, you should stay out of the market.