Guide to Forex volatility trading strategies: In times of high uncertainty, many traders miss opportunities of gaining big profits. How to identify such patterns?
AtoZMarkets – The increased activity in the markets often implies broader and possible more unpredictable price movements. Many traders wonder how to trade fast or panic market. This is the matter we are going to discuss below.
Guide to Forex volatility trading strategies
Forex market is very volatile and lively, where one day the conditions dictate stable environment, and another day is full of uncertainty. Moreover, market analysts suggest that greater activity can imply lesser predictability of Forex market movements.
The most active period in Forex market is during the London session and the overlap of London/New York session. The figure below shows the Forex currencies activity during the key trading sessions. Since greater activity can cause more erratic moves, traders’ ability to forecast the changes in prices is threatened.
Now, we take into consideration the normal causality of the fast markets – external factors. Such stimuli can appear in face of anything in this world, starting from the natural disaster, and ending with the manmade/political/financial events globally. Considering this fact, we have to admit that Forex market movements can be even more drastic. This implies that price movements can have even greater magnitude. Consequently, price forecasting is even harder.
Why consider trading breakouts to handle fast markets?
The answer is as follows: price movements can have a great magnitude, while simultaneously becoming more unpredictable. This is the reason to trade breakouts to handle the panic volatility in the market. In case we are on the right side of the move, the price can shift for a persistent time. This can provide us with greater potential gain targets in case we are correct.
However, in case we are on the wrong side of the market movement, then we are able to cut our losses in advance before the pair plays against us. In this way, we save out accounts. As a fact, such scenario is happening in more than 50% of the cases.
The critical point to consider here is the necessity of strong risk-reward ratios. (e.g. the trader is risking 20 pips while expecting 100 pips in case of proper forecast). In general, we can assume the risk-reward ratio to be 1:5 as a good ratio. Such planning can allow high volatility play in your favor.
How to Trade Price Breakouts?
One simple way of seeing the breakout strategies is to imagine the ranges and then reverse it. Range-traders seek to buy support and sell resistance. Breakout traders are waiting for breaks of resistance (being bullish) to buy, and seeking to sell in times support is surpassed (being bearish).
There is a number of ways of spotting the support and resistance levels for the purpose of breakout strategies. Some of the traders don’t even consider indicators. They are just analyzing and building their strategies off price and price action. However, I believe the organization and planning element is very important. Some of the traders use strategies, which are based on indicators to identify support and resistance levels. Whichever approach is taken, it is vital to understand that the identification of false breakouts is impossible. For example, it is quite possible that the price can break the support level shortly before popping back to the previous range. Such scenario can be disappointing for breakout traders, but almost unavoidable.
Many ask: is it possible to prevent false breakouts? Market analysts are agreeing on the loud “No.” Such answer is explained by the simple fact that we have discussed in the very beginning of the article. Global markets are a highly unpredictable organism, where there is no genius trader in the world, who is able to know what happens next.
Thus, the only adequate recommendation for trading panic markets from me: protect your trade, protect your account, plan thoroughly, and trade your plan.
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