Volatility And Risk Management In Forex Trading

Forex pairs can be volatile. Movements within some forex pairs are renowned for their volatility. For example, the US dollar versus the South African Rand USD/ZAR is a particularly volatile pair. As is the US dollar against the Swedish Krona USD/SEK or the US dollar versus the Norwegian Krone USD/NOK. Entering into any trades in these pairs, you know you will encounter big swings and high volatility. For more experienced traders that could be the draw to trading these pairs, as volatility can also provide opportunity. It can be very difficult to make money in a market which doesn’t move.

But these are an extreme. Even pairs that are traditionally less volatile than the ones discussed above, can still see some fair large daily swings. Let’s consider the euro versus the US dollar, EUR/USD, this is a very liquid, popular pair to trade. It can have quieter days, where the trading range is just some 50 points, however it can also experience much more volatile days where a trading range in the region of 100 to 150 points is not unheard off. Whilst this level of volatility can be pleasing for the more experienced trader, newcomers might find these move intimidating.

The most important thing to remember when trading forex, and particularly in volatile markets, is risk management. Points to consider are firstly your trade exposure and secondly stop losses.

Trade Size

It is essential to understand what your trade exposure is or put simply, the size of your trade. This is quite simply your stake multiplied by price. Do not open traders which are too large for your trading account, trade sizes that you can’t support should the price move marginally against you. Most brokers have an automatic stop out policy, whereby if you don’t have enough money in your account to cover your margin for your trade; your trade will be close out.

Stop losses

Secondly, think carefully about stop losses. A stop loss is an order which closes your trade if the marked level is breached. Where you decide to place your stop loss will vary greatly depending on your strategy and trading style. Day traders will keep stop losses tight and will expect to be closed out of a good number of trades per day, but will allow winning trades to run, meaning lots of small losses and a few bigger wins. Longer terms traders will look to set their stops further away, allowing the trade to move through market noise in order to follow a trend.

Once you know your trading style, day trader, swing or trend trader, then there are different strategies for identifying the level of the stop. For example, using supports and resistance levels, trend lines to name but a few.

 

Look to trade with a forex broker which offers the appropriate tools and education for you to take control of your risk management. Vantage FX is an Australian based forex broker which provides clients with free risk management tools. They have top rated educational tools to help newcomers understand the different tools available, and how to control trades.

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