Back in June, Reuters reported that the Forex market volatility had fallen to its lowest level, since before the COVID-19 pandemic roiled markets in 2020. The foreign exchange (forex) market was nearly frozen, as investors waited for clearer signals on inflation trajectory and the central banks’ response. Although volatility levels weren’t close to record lows, trader hesitance left major pairs at a below-average volume.
Market volatility is determined by current global market conditions, including geopolitical factors, trade wars, monetary policy, and market sentiment. The market often fluctuates as a response to the global situation, which is why it has undergone countless cycles of crashes and booms in the past five months. Some traders have lost a sizable portion of their trading capital, while shrewd traders managed to capitalize on the price swings to make a profit.
As we currently live in volatile times, it’s good to train yourself to make smart trading decisions. As discussed in our post on ‘Is Forex Trading a Viable Career?‘, the forex market is highly liquid with a number of participants filling in large currency exchange orders quickly. For the most part, price manipulation and anomalies are unlikely; except for volatility, forex generally results in a narrower spread and better pricing.
Here are some tips on how you can use market swings to your advantage instead:
Work with your risk appetite
When the market is volatile, knowing your risk appetite is key to managing profit opportunities. Any trader knows that risk is implicit in every trade, which is why they must respect certainty over risk to avoid huge losses. An inexperienced trader (or someone risk-averse) should cut risk during times of increased volatility by reducing leverage and position size. By trading with smaller positions, they can make small profits when the market moves in their favor, and only take minimal losses when it doesn’t. It’s best to know all possible entries and exits, so you know the expected returns on each trade and compare your trades accurately.
Focus on trading major pairs
The forex market is the largest financial market on the planet, which gives it unmatched liquidity — or the ability to buy or sell quickly at the current market price. While there are many currency pairs available for trading, it’s better to stick to major and stable forex pairs when things are particularly volatile. According to FXCM, the bid and ask for EUR/USD is currently at 1.18938 to 1.18939. Major pairs like this often have a high level of liquidity, even if markets are moving in crisis, so the opening and closing positions won’t be a problem. Other pairs to pay attention to include USD/JPY and USD/GBP – these are major forex pairs that are closely studied by the experts, so you have enough information to make good trading decisions.
Trade in derivatives
The competition in the forex market also allows currency traders to take advantage of instruments that use currencies as the underlying assets. Forex derivatives are contracts to buy or sell foreign currencies at a future date, and World Finance notes that volumes for derivative trading went up sharply across the board in Q1 2020. Active trading in derivatives means you don’t need to buy underlying currencies; you only need to predict how the market will move. If your prediction is correct, you’ll earn a payout. Derivatives also allow you to take short bets quickly and open positions for different durations. This is especially useful when the market fluctuates, crashes, and rebounds throughout the day.
Know when to stop
Volatile market swings can make the market unpredictable, which influences traders to abandon plans and patience. Don’t let your impulse towards gaining big profits control your decisions; practice discipline by knowing when and how to stop and never acting on emotion. Keep an eye on your trades so you can make a profit, adjust your strategy, or stop a loss. Setting up stop-loss and take-profit levels are smart ways to manage trades. You can also set a daily time limit for yourself so you can ensure you keep your gains, rather than lose them to a bad decision.