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Forex Risks in Volatile Markets

The periods which are followed by high volatility involve powerful Forex risks. Traders should take into consideration various options of impact, considering the factor that average daily movements increase during the periods of excessive volatility. The calculation needs to be made in a half or one percent of provided margin funds regarding how certain levels and the size of transactions will have an impact on the trading account.

forex risks

Amid normal market conditions, expecting to make to 50 or 100 pips, two lots transactions will be the most suitable. In the case of potential loss of 200 pips throughout more volatile periods, in relation to profitability Forex risks are much higher. As an alternative, to compensate increased volatility, traders may consider smaller transactions. More reasonable will be one lot trading instead of average two.

Decrease Forex risk moving stop orders closer

Often traders believe that large fluctuations increase the probability of stop order execution and, therefore, don't consider moving stop orders closer to reduce Forex risks. However, closer placement of stop orders considerably simplifies management of a situation in volatile markets.

For example, trading the EUR/USD currency pair, try to place the stop order for transaction protection at 50-60 points. Such actions will provide better protection of a transaction, reducing Forex risks and providing you the possibility to leave the market without huge losses.

Actually, every currency pair has its own stop order width, and some of them have broader ranges of fluctuations. So, for example, for GBP/JPY or AUD/JPY the average day range will constitute 50% more, than at EUR/USD, therefore, stop orders at them will be wider. But, we should keep in the mind that in volatile markets stop orders shouldn't be as wide as in the average conditions. The stop order 100 points lower than entry level can be replaced with 75 points, lowering the stop order by 25 pips.

Decrease Forex risk due to transactions selectivity

Very often traders in extremely changeable markets try to place the maximum quantity of transactions as the market moves very actively and it is very attractive to use all the trading opportunities. But you shouldn't forget that Forex risks are much higher during the periods of extreme volatility. Therefore, placing the transaction, analyze risk level. Designate, what scales of risks you are ready to accept morally and financially. For example, while waiting for the situation stabilization use another financial tool and exclude volatile currency pairs.

Decrease Forex risk due to the increased discipline

Any market situation requires the determined action of the trader, according to his trading strategy. Extreme market volatility periods demand from the trader the high level of self-discipline and self-possession. For proper risk management, it is necessary to follow accurately all rules of market entry/exit. Such actions will help to determine Forex risks and to control situations.

Decrease Forex risk knowing market drivers

To reduce Forex risks, the trader has to know what kind of situations usually appear in highly volatile markets and to be ready to take certain actions. The trader has to adapt his trading strategy to market situation, and not just to a certain currency pair. First of all it is necessary to take into consideration market emotions: what feeds customers rush - fear or bullish moods? The emotional part and traders' reactions are indicators which conduct the market to the emergency situations. This fact creates volatility by banal supply-and-demand balance.

One more factor influencing the variability of the market is economic events. Such situations allow participants of the market interpret data differently, not so trivial, as most of beginning traders. Such example is the ordinary monthly industrial report published in many industrial developed economies.

Often the market reacts rectilinearly to certain monthly data. Very often traders can't understand logicality the market decrease while appear the positive indicators of production growth. But the answer is very simple: due to another interpretation by the market, sharp change of market participants positioning followed. Some traders find exclusive trading opportunities, and others simply catastrophic Forex risks.

It is easy to determine panic manifestation in a certain market environment. The sales performed under the influence of panic motives don't move to accurate tracing and form the volatile markets. Such situations lead to that traders start changing transactions strenuously, and happens so that the transaction initially true, are closed prematurely. Such provision very often involves a big panic and, as a result, market volatility. Traders have already ceased to follow the trading strategy and rush behind some ephemeral instant profit, often been guided by a desire to return the lost means. This process proceeds indefinitely, and only the certain direction of the market can stop it.

The simple rules, along with a general understanding of the trading atmosphere, help to enhance the trading strategy of the trader and to reduce Forex risks. Very often there is a number of excellent trading opportunities which only need to be applied correctly in excessively volatile markets.

forex risks

Therefore, attentively penetrate into an essence of the provided rules to cope with situations in the conditions of market volatility, considering Forex risks. Namely, adapt leverage for volatile markets, choose a certain risk level, move stop orders closer, analyze and don't hurry to enter the transaction at the first sight of profitability.



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Number of comments: 4
  • Stacey
    • #

    Actually, exactly volatile markets offer a great possibility to earn considerable profit. And also to test your ability to make decisions in stress conditions.

  • Me.fly
    • #

    Right now we should be very careful in trading. Waiting for UK bank today, hope it will bring some good news.

  • Chester
    • #

    I'm always afraid to move stop orders closer. After all I see that I'd better move it, but every time I just can't fight myself.

  • Kendra.cole
    • #

    To distinguish market drivers really matters. Because sometimes only mass hysteria can lead to events without any logical background.