Volatility refers to the amount by which an asset price fluctuates at a given period in time. In other words, a volatile market environment means that price fluctuates by a huge amount compared to periods of lower volatility in the markets.
Volatility is determined by taking a look at chart indicators, namely moving averages or Bollinger Bands. On top of that, the VIX or volatility index can be used to estimate future volatility. The VIX is calculated by using the S&P 500 options implied volatility for 30 days. This shows how market participants are expecting price volatility to fare in the coming trading days. A high VIX shows that theres a lot of uncertainty and that more volatility is likely while a low VIX means that market price action is expected to be more stable.
High volatility can have a material effect on your trading and necessary adjustments must be made in order to weather potential spikes in price action.
A good way to start is to take a look at how the average movement of a particular pair has changed in the past few days compared to other periods. For instance, GBP/USD could be moving at 50 pips a day during less volatile days but could fluctuate by as much as 100 pips a day for more volatile market days.
From there, you can decide on whether you need to make some adjustments in your stop losses and profit targets. You can modify your stops to wider ones to give more leeway to potential spikes in price movement or you can set smaller profit targets so that youre out of the trade before price starts to turn. In addition, you can also consider holding on to trades for shorter periods if you expect quick reversals in the intraday price action.
In addition, volatility is treated as a gauge of market uncertainty. A high volatility reading means that market participants are on their toes and that price action can be vulnerable even to lower-tier reports.
With that, you should also consider being more watchful of economic releases and market updates during volatile trading days. A prudent move would be to lock in profits or adjust stops prior to an economic release in order to prevent sudden moves from resulting in unexpected and large losses. Always remember that, during these cases, market sentiment can shift on a dime and its best to manage your risk properly in order to protect your account.
Volatility is determined by taking a look at chart indicators, namely moving averages or Bollinger Bands. On top of that, the VIX or volatility index can be used to estimate future volatility. The VIX is calculated by using the S&P 500 options implied volatility for 30 days. This shows how market participants are expecting price volatility to fare in the coming trading days. A high VIX shows that theres a lot of uncertainty and that more volatility is likely while a low VIX means that market price action is expected to be more stable.
High volatility can have a material effect on your trading and necessary adjustments must be made in order to weather potential spikes in price action.
A good way to start is to take a look at how the average movement of a particular pair has changed in the past few days compared to other periods. For instance, GBP/USD could be moving at 50 pips a day during less volatile days but could fluctuate by as much as 100 pips a day for more volatile market days.
From there, you can decide on whether you need to make some adjustments in your stop losses and profit targets. You can modify your stops to wider ones to give more leeway to potential spikes in price movement or you can set smaller profit targets so that youre out of the trade before price starts to turn. In addition, you can also consider holding on to trades for shorter periods if you expect quick reversals in the intraday price action.
In addition, volatility is treated as a gauge of market uncertainty. A high volatility reading means that market participants are on their toes and that price action can be vulnerable even to lower-tier reports.
With that, you should also consider being more watchful of economic releases and market updates during volatile trading days. A prudent move would be to lock in profits or adjust stops prior to an economic release in order to prevent sudden moves from resulting in unexpected and large losses. Always remember that, during these cases, market sentiment can shift on a dime and its best to manage your risk properly in order to protect your account.
No comments:
Post a Comment