A volatile market, due to its unsteady nature is automatically viewed as a fearful enemy by many new traders but it implies many connotations which do not carry any truth.
Before you love it or hate it, you must understand it.
Volatility is the extent to which a market can be bought and sold at stable prices. Higher volatility means there are more buyers and sellers investing in the same asset, which means the price of that asset can change more abruptly. So a volatile market, is a market with a) more sellers and buyers b) a sharper and faster level of price movement.
So why does a volatile market present opportunities?
A fast-moving market can scare traders because of potential losses, but it is important to remember that bigger price movements go both ways. If you buy an asset and it moves 10 pips up, you make more than if it moved 4 pips up. So without volatility it is very difficult to make gains trading
At a time of crisis or big economic events which create a volatile market, the best opportunities are presented and the market fluctuates widely and therefore offers the potential for bigger gains.
For this reason volatility should not be avoided, but embraced with caution.
Volatile market and spreads
Many new traders associate volatility with higher spreads! Even when they don’t fully understand what spreads are they know that they don’t have any control over them in a volatile market.
In the case of trading with floating or variable spreads, this is true, and a highly volatile market widens spreads which increases costs. But the secret is in trading on fixed spreads which do not narrow or widen, the spreads are set at a specific level which is clarified from the start.
This means taking full advantage of the opportunities volatility presents and not worrying that your spreads will change.
Risk management in a volatile market
Prices moving rapidly can sometimes cause bigger losses, but this does not have to be the case, not if you have your risk management tools in place. Risk management is one of the key aspects to trading a volatile market.
By placing a guaranteed stop loss, you are dictating your trading account to only allow a certain level of loss no matter what. Likewise, you can place a take profit and when your account reaches the level of profits you have specified, your trade will close and you can take your profits without risking further losses.
Keep in mind that a lot of brokers offer stop loss but you must make sure it is a guaranteed stop loss which will not let you down no matter how sharp the movements. You can test that by opening a demo account first.
There are even more advanced tools which can help you better control your risk. Freeze Rate is a tool which allows you to freeze a rate for a few seconds. This way you can wait and see if a better rate comes along. But if a better rate doesn’t come along you can still enter the market at the rate you chose to freeze even if the live rate has already changed.
In a volatile market this is an invaluable tool for a trader, because the speed at which prices change can be challenging, with freeze rate you are given more time regardless of how fast the market is moving in real time. Freeze Rate can only be found on the easyMarkets platform .
Another unique tool which can help you is dealCancellation*. This tool allows you, for a small fee, to undo any losing trade within 60 minutes.
With a good understanding of the market, and all your risk management tools set, a volatile market can be a great time for a trader to take advantage of market opportunities a volatile market is a part of investing and should be understood and embraced not feared
Sources: Liquidity. Investopedia.