Below, you can find an overview of the pressures of a volatile trading market, the importance of creating your personal trading strategy, including an overview of what forex and CFD trading is, how to trade with the trend, how to conduct technical and fundamental analysis, as well as what risk management is.
In this lesson you will learn:
- Common pressures of volatile markets
- The importance of creating a strategy
- How to conduct technical and fundamental analysis
- What risk management is, and how you can implement it
Common Pressures of Volatile Markets
What differentiates professional traders from beginners is often their ability to adapt to any situation on the markets, and not shy away from volatility. While volatility can present a significant investment risk, it can also present an opportunity for shrewd investors. In this section, you can find out how to deal with pressure and stay on top of your trades even during high volatility.
What Is Volatility?
First, let’s take a look at what volatility even is. Volatility refers to the amount of uncertainty, risk and fluctuations that occur on the market and, most often, to the amount of price changes over a given period on the financial markets. It’s a statistical measure of the dispersion of returns for any given instrument.
Assessing Current Volatility
When it comes to assessing how volatile the markets currently are, most traders tend to follow the Volatility Index (VIX).VIX is a weighted index of implied volatility in options contracts on the US S&P 500 index.
In effect, it’s a gauge of fear or pessimism in the market of 500 large capitalisation US stocks listed in the US. As such, it functions as a barometer of general market confidence and risk appetite.
How to Trade Highly Volatile Markets
As is true for trading in general, trading volatile markets requires the trader not only to have in place a solid plan, but also to be mentally and emotionally prepared to manage risks. Most of all, traders need to be able to recognise the potential for significant loss of capital and still be comfortable trading.
If or when the trader is in the right mindset to start trading, the next thing to do is to revisit the risk control measures they have in place as part of their standard trading strategy. This includes their position size and stop-loss placement. Some traders, for example, decide to place smaller trades when the markets are volatile, and use a wider stop-loss compared to when the markets are quiet.
The Importance of Creating a Trading Strategy
Creating your own custom trading strategy that fits your needs, personality and objectives can make dealing with pressure a lot easier, which means you can stick to your trading plan even when the unexpected happens.
While the thought of coming up with your own trading strategy might seem daunting at first, it actually entails nothing more than consistent application of the rules that you set for yourself, such as specific entry and exit points, trading in the direction of the prevailing trend, using moving averages, or using a stochastic indicator to help determine whether or not it’s safe to enter a trade after a moving crossover. Whatever it is, it should be unique to your and your needs.
How to Conduct Technical and Fundamental Analysis
The best trading strategy relies on a combination of technical and fundamental analysis. In this section, we’ll take a look at what exactly the two types of analysis are, and how to make the most of them.
Technical Analysis
Technical analysis is one of the most popular methods used today by traders to help them identify trading opportunities. It’s based on three simple principles: the market discounts everything, prices move in trends, and history repeats itself.
One of the key features of technical analysis is that it only considers price movement, while completely ignoring fundamental factors, since all these factors are considered to be contained on the chart itself. Therefore, the only thing that needs to be considered is the movement of the price itself.
Any unexpected events, such as natural disasters or geopolitical tensions, may affect the market, but a technical analyst is never interested in the reasons behind the price move. Instead, they focus on the chart itself; the shapes, patterns and formations occurring on the chart.
Fundamental Analysis
Whereas technical analysis focuses on the analysis of charts, fundamental analysis is based on analysing macroeconomic and political events. Fundamental analysts use an array of available data, including corporate earnings reports, macroeconomic data, geopolitical events, central bank policy, environmental factors, market sentiment, and more to help them with their analysis.
Fundamental traders then use this data to highlight discrepancies between current market price and its true value price, and then look to trade on the basis that a market’s price may return to its proper value.
Along with macroeconomic data, other important factors in fundamental analysis include the monetary policy carried out by central banks, interest rates, open market operations and central bank interventions, which are all closely monitored by financial analysts and traders alike. Moreover, fundamental analysts keep an eye on the outside influences that could affect an instrument’s value or price movement, such as floodings, earthquakes, and other natural disasters.
It’s important to note that technical and fundamental analysis often go hand in hand, and most successful traders are masters of seeing the complete picture.
What Risk Management Is, and How You Can Implement It
Risk management is one of the key concepts to long-term success in the financial markets. A good risk management system consists of three aspects:
- A trading system with an edge: whatever it is, your trading strategy needs to be unique to you. After all, you will be the one using it. This includes a consistent application of the rules which govern a particular strategy, such as specific entry and exit points or always trading in the direction of the prevailing trend.
- Controlling your emotions: emotions like fear, greed, or excitement can stop you from sticking to your plan, creating potentially negative results. Keeping your emotions in check and sticking to your trading plan can help you with sticking to your plan.
- Money management: good money management is a vital part of trading successfully in the long term. It’s the part of your strategy that specifies the size of the position, the amount of leverage used and any Stop Losses and Take Profit levels.
If you want to continue learning, make sure to visit our Trading Academy, where you can find beginner, intermediate, and premium courses that can help you improve your trading skills.
To find out more about controlling emotions when trading, visit How to Prepare for Success Course and How to Control Your Emotions Course.
This content has been created by XTB S.A. This service is provided by XTB S.A., with its registered office in Warsaw, at Prosta 67, 00-838 Warsaw, Poland, entered in the register of entrepreneurs of the National Court Register (Krajowy Rejestr Sądowy) conducted by District Court for the Capital City of Warsaw, XII Commercial Division of the National Court Register under KRS number 0000217580, REGON number 015803782 and Tax Identification Number (NIP) 527-24-43-955, with the fully paid up share capital in the amount of PLN 5.869.181,75. XTB S.A. conducts brokerage activities on the basis of the license granted by Polish Securities and Exchange Commission on 8th November 2005 No. DDM-M-4021-57-1/2005 and is supervised by Polish Supervision Authority.
