When market participants talk about volatility, they are referring to the change in average price fluctuations for a particular time period. Simply put, volatile trading days means that there are larger price movements for the day or week compared to times when the market is said to be less volatile.
This behavior is usually measured by technical indicators, such as Bollinger Bands or moving averages. In addition, the volatility index or VIX is also used to predict how volatile price action is expected to be. This is determined by looking at the implied volatility of S&P 500 options for the next 30 days. A high VIX reading reveals that market participants are feeling uncertain while a low VIX figure shows that traders are in a stable market environment.
High volatility can have a material effect on your trading and necessary adjustments must be made in order to weather potential spikes in price action.
A good way to start is to take a look at how the average movement of a particular pair has changed in the past few days compared to other periods. For instance, GBP/USD could be moving at 50 pips a day during less volatile days but could fluctuate by as much as 100 pips a day for more volatile market days.
From there, you can decide on whether you need to make some adjustments in your stop losses and profit targets. You can modify your stops to wider ones to give more leeway to potential spikes in price movement or you can set smaller profit targets so that youre out of the trade before price starts to turn. In addition, you can also consider holding on to trades for shorter periods if you expect quick reversals in the intraday price action.
In addition, volatility is treated as a gauge of market uncertainty. A high volatility reading means that market participants are on their toes and that price action can be vulnerable even to lower-tier reports.
In this case, you should be more watchful of upcoming reports and market events. To protect your account or profits, you can exit trades prior to the event or you can simply move your stop to entry for a breakeven trade. Bear in mind that, even with unpredictable market behavior, you can stay on top of your game by making good decisions in terms of risk management.
This behavior is usually measured by technical indicators, such as Bollinger Bands or moving averages. In addition, the volatility index or VIX is also used to predict how volatile price action is expected to be. This is determined by looking at the implied volatility of S&P 500 options for the next 30 days. A high VIX reading reveals that market participants are feeling uncertain while a low VIX figure shows that traders are in a stable market environment.
High volatility can have a material effect on your trading and necessary adjustments must be made in order to weather potential spikes in price action.
A good way to start is to take a look at how the average movement of a particular pair has changed in the past few days compared to other periods. For instance, GBP/USD could be moving at 50 pips a day during less volatile days but could fluctuate by as much as 100 pips a day for more volatile market days.
From there, you can decide on whether you need to make some adjustments in your stop losses and profit targets. You can modify your stops to wider ones to give more leeway to potential spikes in price movement or you can set smaller profit targets so that youre out of the trade before price starts to turn. In addition, you can also consider holding on to trades for shorter periods if you expect quick reversals in the intraday price action.
In addition, volatility is treated as a gauge of market uncertainty. A high volatility reading means that market participants are on their toes and that price action can be vulnerable even to lower-tier reports.
In this case, you should be more watchful of upcoming reports and market events. To protect your account or profits, you can exit trades prior to the event or you can simply move your stop to entry for a breakeven trade. Bear in mind that, even with unpredictable market behavior, you can stay on top of your game by making good decisions in terms of risk management.
About the Author:
To find out what market behavior is and how it can affect you, simply click the link.
EmoticonEmoticon