As foreign exchange market volatility has certainly picked up in the last couple of months, traders are seeing a lot of opportunity.  However, with opportunity there may also be losses for those not so accustomed to the wild fluctuations.  In this case, traders must always look to evolve and change to the current market environment in order to come out on top at the end of the day.  Here are five things to consider when attempting to capitalize on situations when the going gets tough.

1. Tighter Stops

Yes, tighter stops increase the likelihood that the position will be taken out.  However, they can also provide great risk managers in times of high volatility.  For instance, when trading EURUSD, instead of placing an 80 pip stop to protect your position, maybe consider a 50-60 pip stop.  This will insure the protection of your currency position whereas if the stop is broken, there is a high likelihood that the trend will continue lower.  Of course, the parameter does depend on the currency pair that you’re trading as well.  In a currency cross like the GBPJPY or AUDJPY, traders may be more inclined to keep wider stops, but not as wide as before.  Instead of a stop 100 pips lower, they may consider a 75 pip stop placement.    

2. Be Selective

In volatile times, keep in mind that losses will also likely be big.  This will help in assessing a trader’s risk tolerance and force the trader to become more selective.  Instead of trading a violent pair, the investor or market fanatic will likely shift their interest somewhere else for the time being until things settle down. 

3. Discipline

Along with tighter stops, a trader will additionally need to keep to their predetermined strategy.  Any set stops, contingency plans or risk management benchmarks must be adhered to without contention.  This will help in defining how much risk is obtained and maintained should price action be uncontrollable.  Nothing hurts more than being a deer in headlights. 

4. Leverage

Given that volatility can cause losses to seem traumatic, traders should also be considering their leverage.  Whether it be 1 percent or even a half percent, investors should be mindful of how much leverage or even position size can affect their portfolio.  Taking on a 2 lot position is fine in normal market conditions when you are looking to make about 50 pips.  It is not so effective when there is a potential loss of 100 pips in the making, definitely not a 2:1 ratio.  As a result, smaller position size per trade may be a better proposition when things get a little heavy.

Tags: FX, Volatility

This entry was posted on Monday, October 27th, 2008 at 9:18 am and is filed under Currency Trading, Discussion. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.