Overview
Volatility can simply be defined as a statistical measure associated with the tendency of a market, or security, to either rise or fall sharply in a short period.
Volatility is measured by the standard deviation of the return of investment and the standard deviation is a statistical concept which denotes the amount of variation or deviation, which can be expected.
Volatile markets can typically be characterized by inherent wide price fluctuations as well as periods of the high trading volume. These markets are often the result of imbalances of trade orders in one direction.
Volatile markets can also be driven by factors such as economic releases, company news, recommendations from experts and financial analysts, popular initial public offerings (IPO), or unexpected earnings results. Some may place the blame on day traders, short-sellers, and institutional investors.
What to expect when investing/trading in a volatile market
While the best way to deal with a volatile market would be to avoid it altogether, it means that many traders, especially those who participate in the forex market and stocks market, would miss out on some of the best trading opportunities.
Investors, especially those who make use of online brokers, should know that in times of market volatility, many brokers tend to implement procedures designed to decrease the exposure of the broker as well as their forex traders to extraordinary market risk.
During volatile market conditions, there are high volumes of trading which may result in delays in trade execution. These high volumes can also result in trade execution at prices that differ significantly from market prices that were quoted when the order was entered.
Investors and retail traders must ask their online brokers to explain how market makers handle order executions when markets are volatile. This will ensure that they know what to expect during these market conditions and how their trades will be affected.
The forex market is one of the largest, most volatile, and liquid financial markets in the world. Major currency pairs in the forex market are renowned for experiencing times of high volatility.
While many experienced traders use trading strategies to harness these conditions, others use technical analysis to keep an eye on the volatile conditions so that they can re-enter the forex market once volatility has died down.
Tips for trading in a volatile market
When markets are experiencing high volatility, forex traders must consider the order type that they choose. A market order will always be executed, but in volatile markets, traders may be surprised by the price that they receive, which can differ from the price at which their trade was quoted.
During volatile market conditions, the limit order, which is placed with a forex broker to buy or sell at a predetermined price and either at or better than a certain price, is the best order to use.
Limit orders may cost more than market orders, but they are the best to ensure that forex traders purchase their volatile currency pairs at a set price.
During high levels of market volatility, forex traders must ensure that they use all the risk management tools at their disposal along with helpful trading strategies that will harness the volatile conditions.
In addition to this, forex traders can also trade using charts and technical indicators, use stop losses, and keep their position sizes lower while volatile conditions continue.
Another important tip is that traders conduct thorough fundamental analysis, technical analysis, or a combination of both, to determine ideal entry and exit points. Traders can also trade around news and events that are likely to increase market volatility.
The only true way to ensure that forex traders can safeguard their capital and avoid losses is to adhere to their trading plan and forex trading strategy, detailing different market conditions and exceptions in trading.
