In extremely volatile markets, when the price starts to move almost uncontrollably, the first rule for many traders is to close a position.
On the one hand, this decision is reasonable, because in this way you can limit your risks, but most traders forget that it is the high volatility that allows them to count on getting the maximum income with a competent strategy and compliance with all the rules of trading discipline.
Every trader must make this decision independently, but it is very important to understand that your results will directly depend on the quality of services provided by the broker and its honesty. Those traders who understand this, choose for themselves reliable and trustworthy brokers, such as Exness. The broker provides the opportunity of comfortable trading with all existing instruments, providing its clients with the best trading conditions, as well as additional opportunities for making the right decisions. To become a better trader, trust only the best.
And right now we will take a look at the concept of volatility and give you some important tips to help you trade even in extreme volatility conditions.
What is volatility?
Volatility is the ability of the price of a certain trading instrument to rise and fall over a certain period. This property of the price is normal. Even though many traders consider high volatility instruments to be very risky, they might bring the biggest profit.
Is it possible to avoid volatility?
The basic aspiration of most traders is to invest in trading instruments with low volatility to gain stable income. However, it is important to realize that such tactics will never work. Even trading instruments with low volatility at a certain moment can fall sharply in price and also rise sharply.
Imagine what would happen if volatility did not exist. The prices of trade instruments would simply remain static, that is there would be no difference between them. And it is on the difference of buy and sell prices traders receive their income.
Thus, it is safe to say that volatility is the most important factor for profit. As for losing money by traders, it is also quite natural, because at financial markets there is no other money except traders’ money, which means that for someone to make money, someone must lose, but at the same time, he must learn the right lessons from what happened.
To close a position in highly volatile markets or not?
There is no single correct and universal answer to this question. First of all, you need to assess your risk tolerance. If even the slightest fact of high volatility and a higher probability of making a loss terrifies you, in this case, it is better to close the position and fix even a minimum, but still profitable.
If you are aiming at getting the maximum profit and you are ready for any market surprises, and most importantly, you have all the stop-orders set and you follow your strategy, in this case, stay in the market.
Whether you decide to close your position during a period of high market volatility or to wait a little longer, it is important to stay focused on your objectives. Such emotion as greed makes traders open new positions even after reaching their trading objectives, but this practice leads to very serious problems.
In such situations, it is very important to stop in time and realize that trading on financial markets will go on forever. You mustn’t try to earn all the money of this world during one trading session because you can face such a problem as emotional burnout, especially if the market is highly volatile now and the stress level will be just off the scale.
When you have reached your trading goals, the best thing to do is to finish trading, summarize your trading results to rest, and then, the next day, resume your trading decisions and take profit.
Some tips for trading in high volatility
If you decide to keep your trade open and continue trading during a period of high market volatility, be sure to follow these tips:
1. Never forget proper risk management. You should not be a hero and trade without stop orders, because during periods of high volatility, such tactics are the most dangerous. You must be very clear about your trading strategy and your objectives when day trading, and if you have already achieved your objectives, it is best to close your positions and call it a day.
2. Don’t forget the rule of diversification. Even if you decide to continue trading, but you take a loss, it can be compensated by taking profits on other instruments. If you invest all of your capital in one trading instrument, nothing will compensate for your loss. That’s why it’s important to follow the rule of diversification, and never put all your eggs in one basket.
3. Control your emotions. While novice traders keep looking for the Holy Grail, which is a trading strategy bringing them a guaranteed profit in any market (which, of course, does not exist), more competent and experienced Exness traders keep working on controlling their emotions. After all, it is emotions that very often make us stay in the market at the moment when all factors are pointing to close the deal. Emotions such as greed drive a trader to abandon their trading system and act chaotically, making decisions in the hope of luck. Before you start trading, especially in periods of high volatility, remember one important rule: either you control your emotions or they will control you.
4. Choose trending assets for yourself. If you choose to trade Microsoft stock or other blue chips, you are less likely to face high volatility than if you trade bitcoin and another cryptocurrency. How do you invest in cryptocurrency? Well, before investing your money in an asset, first, familiarize yourself with how the price of that asset has gone down and up in the past. Because history is known to repeat itself, and if the price of an asset went down sharply in the past, the same thing can happen in the future. The best cryptocurrency to invest in could be volatile or less volatile – it’s your choice. By adding stocks of well-known companies to your portfolio, not only can you protect yourself from high volatility, but you can also expect to make profits over the long term, and even receive dividends.
5. If in doubt, it is better to wait. Never open a trade at the moment when you doubt its correctness. If the risks significantly exceed the potential profit, in such situations, it is best to stay out of the market. If you enter the market, the price begins to fall, and you have any doubts about keeping your position open, it is best to close it because when you give in to emotions, the chance that you will make bad decisions increases significantly.
When comparing UK stockbrokers, you’ll want to be sure that you choose a broker which handles extreme trading volumes during unusually fraught trading sessions with ease. Some brokers have been known to halt trading in specific securities due to back-office issues during turbulent periods.
Maintain trading discipline, follow the rules of diversification and make sure to use stop orders to protect yourself from higher risks during periods of high market volatility, and of course, strictly follow your trading strategy and modify it when necessary – then even trading in highly volatile markets will not make you close your position and abandon your goals.