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Here Are 7 Strategies To Handle Forex Volatilty

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Here Are 7 Strategies To Handle Forex Volatilty

Post by JPMorgan on Mon Oct 13, 2008 2:48 am

Welcome Everyone,

We are witnessing some of the most volatile and explosive moves in history this past week. And, not just in the stock market. Gold has had $100 moves, the forex markets which until recently generally only moved 80 -150 pips in a day are now doubling and tripling that and more. Heck, in the last few hours of trading the USD/CDN jumped 400 pips!

These moves are nothing short of amazing and not for the faint of heart. While they can reward you with the moves you have always dreamed about, God help you if you are on the wrong side of the trade. With this current volatility you can find a 100 pip move against you in 5 minutes.

I have received a flood of emails from traders wanting to know how to trade with all this volatilty. Here is a sample letter from John P. from the Gold Coast of Australia:

"The reason for the email is to talk about volatility. For the past few months the weekly chart of the EUR/USD is amazing and the size of the weekly candles are unprecedented for the charting history I have access to. Almost 800 pips two weeks ago which is nothing short of spectacular. The AUD/USD has a range this week of 960 pips this week alone and since the end of July the range is approaching 3000 pips.

This has thrown my trading plan out of the window in the sense that I will have to trade the 15 minute chart rather than the 60 minute chart to stay within the stop loss I had previously set. There would be some times when it would be necessary to go down to even lower time frames to keep within my money management rules. Ugh, I don't want to be glued to the computer."

Ok, let me answer that in a way that can help everyone…

The first thing you need to realize that in trading the game changes and to make it even tougher you never know when the game will change. For now however, the current game has changed from low volatility to extremely high volatility. This creates the opportunity for much bigger gains but also much bigger and faster losses. With that in mind you need to have a plan of attack.

Here are 7 ways to trade these markets…


STRATEGY #1 - Stay out all together. If the current risk is too much or you will have trouble sleeping at night then simply stay out of the markets until thing settle back down. There is no disgrace in that and no one will call you a wimp for playing it safe. Remember, there will always be more days to trade so who cares if you miss a few opportunities.

STRATEGY #2 - Change your "Bet Size". Say you usually trade one standard forex lot, then reduce your bet size and trade 1 or 2 mini lots. This will help drastically reduce your losses if you get caught on the wrong side of an unexpected price move. This will also allow you to use a bigger stop loss which is really essential during these super wide range days.

STRATEGY #3 - Switch to a faster time frame. Just as the trader in the above email pointed out, you will need to change the time frame you trade with. So if you currently like an 60 minute chart drop to a 15 minute. If you usually use a 15 or 30 you could use a 5 minute chart. If you normally use a daily chart then switch to a 2 hour chart. Essentially this will help to reduce your risk becuase the range on the bars has just been too big lately. The faster time frame charts will also help you react quicker to the rapid market movements.

STRATEGY #4 - Focus on one market. There is no rooom for error in these market conditions and this means you need to be 100% focused. A lot of traders like to watch 4 - 10 currency pairs to find more opportunities. For now I highly suggest looking at only 1 - 2 currency pairs. This will help you to have "laser-like" focus and reduce the chance of costly errors.

STRATEGY #5 - You need to be willing to go for the bigger profit targets. It is no good jumping in and out of a trade for a 10 pip profit because in these conditions it can be quite easy to take a 20, 30, 40, 50 pip or more loss. You don't want to operate with that kind of risk/reward strategy.

STRATEGY #6 - Don't over-trade! If you make a nice trade right off the bat, then you are better to turn off your PC for the day. Too many traders start off great and then keep trading and end up giving back all they made. Some even end up with losses for the day. Under these volatile conditions you need to have a "Take the money and run" attitude.

STRATEGY #7 - Get out if it doesn't feel right. Yes, I know that traders want to keep everything very scientific, but there are times when you need to use your gut instinct. So… If you enter a trade and something just doesn't feel right then simply exit your trade. There is no disgrace in this and you can always re-enter. The more experience you have in the markets the more you will come to trust yout intuition. It has saved me big time on more than one occasion.

Well that's all for now. I hope this give you some food for thought and helps you trade better and smarter.

JPMorgan

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