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How to Trade Successfully During Unstable Markets

Forex Trading | by ForexCycle.com | Tuesday, 24 February 2009 04:48 UTC

Many buyers and sellers consider unstable markets to be a time of favorable conditions for trading. While large market variations can represent a great chance for profit, they can also mean losing a lot of money if you are not properly prepared. Unstable markets require traders to modify their approach. In this article, we will look at some important points to consider during volatile markets.

Since unstable markets offer more occasions for trading, buyers and sellers are lured into trading more. This is a mistake because unstable markets also yield greater losses. You should choose your trades wisely, always evaluating risk levels beforehand.

Another important point to consider is the amount of leverage used. Since unstable markets call for a higher average trading range, you need to take into account to what extent leverage will influence your trading. When the margin is 1 % or ½ %, traders must consider what amount of leverage or which position can influence their list of assets. When the market is stable, if you are seeking to gain around fifty to one hundred pips, a two lot position will work well. However, under unstable conditions where you could lose one hundred to two hundred pips, this position is no longer profitable in terms of risk. The solution is to adopt smaller positions, i.e. one lot instead of the average two lot.

Strict compliance with your strategy is a must, irrespective of the situation. This includes times of volatility in which moderation is essential. Risk management benchmarks, set stops and contingency plans have to be followed rigorously. You will benefit from this by being able to determine the amount of risk assumed if price movements get out of control. Failing to do this could lose you a lot of money.

Another mistake that traders make is to refuse to set lower stops in unstable times. By setting lower stops, you can benefit from good risk management during very volatile markets. Let us say that you are trading EURUSD. Instead of protecting your position by using an one hundred pip stop, you should contemplate a fifty to sixty pip stop, which will guarantee that your position is protected and take you out before the trend goes on downwards and increases your losses.

Last but not least, traders should study the root causes of the given market instability so as to be able to anticipate future events. This will help the trader modify his or her strategy to the overall conditions of the market, rather than simply focusing on a couple of currencies. For example, a trader should examine market emotions, i.e. whether the market is going down due to fright or going up because of an upsurge in buyer confidence. When traders overreact, this has a tendency to force a market to full targets and thus bring about instability. In addition to emotions, market instability may also arise from economic occurrences, erratic momentum and panic. The latter is especially critical because it leads traders to focus on quick profits and renounce their trading strategy.

If you adhere to this simple advice, you can reap great advantages during volatile markets.

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