Volatility in the financial markets can be both an enticing and daunting prospect for traders. While it offers the potential for fast returns, it also carries additional risks. Therefore, it is crucial to have a trading plan in place and use the right tools to stay profitable while keeping risk in check. In this article, we will provide tips for trading volatility to help you navigate the markets successfully.
- Use trendlines Trendlines are a vital tool for trading volatility as they help traders cut through the noise and identify the underlying trend in a market. Before opening a position in a volatile market, draw some trendlines to understand precisely how it is performing overall. Additionally, identify key levels of support and resistance, remembering that previous support often turns into resistance and vice versa.
- Don’t just follow the herd One significant cause of market volatility is the herd mentality. As more traders jump into an asset, they drive its price higher, attracting more traders, which only adds to the trend. While riding these trends can provide handsome profits, it is rarely a good idea to trade only because of the fear of missing out (FOMO). Instead, do proper research before trading. However, taking a contrarian view can also be profitable if you think the trend lacks substance. Still, be cautious as markets can remain irrational for a long time.
- Take your position on news early When major market events occur, such as non-farm payroll (NFP) reports or interest rate announcements, your best bet may be to stay out of related markets. However, if you do want to trade the fallout, you must open your position before the release hits. This requires extensive research to make an educated guess about how the release will affect your chosen markets. It is also worth checking other related releases that may offer a hint to the final figure. Once you have made your prediction, you can decide how it might play out across the markets. However, keep in mind that analyst predictions for a release tend to be priced in early, so there may not be much volatility if analysts have got it right.
- Filling the ‘gap’ Markets can ‘gap’ from one price to another when trading is closed overnight or over the weekend, often filling the gap by returning to its previous closing price. A straightforward way to trade volatility is to look for these gaps and trade the subsequent return to the pre-gap price. However, this strategy does not work every time, so be sure to place stops and targets at reasonable levels.
In conclusion, trading volatility can be an exciting and profitable opportunity for traders. Still, it requires a comprehensive understanding of the markets, risk management, and discipline. By using the tips outlined in this article, you can develop a sound trading plan that enables you to take advantage of volatility while minimizing your risk.
