Before looking at volatility trading and how you can use it to excel as a trader, let us take the time to define volatility.
What is Market Volatility?
It is the rate at which an asset price rises or falls, given a set of returns. Volatility is measured by looking at standard deviations of annual returns over a specified period. Simply put, volatility is a measure of how risky an investment is, and it is used in asset pricing to measure fluctuations in returns. Therefore, with higher volatility, we have a market with higher trading risks, and with lower volatility comes a market with lower trading risks. When volatility is used in pricing financial assets, it can help you calculate fluctuations that might occur over the short term.
If the price of an asset fluctuates fast within a short time, then it is highly volatile, while an asset with a price moving slower over a long period is said to have low volatility.
Now that we have covered the definition and basics of market volatility, we want to look at how you can profit using volatility trading. Volatility is your friend, and with the right information, you can make a lot of profit using volatility trading.
Tips for Successful Volatility Trading
You have to understand that, as a trader, one thing you will face at some point is volatility. When markets are moving, here are a few tips for handling volatility trading, helping you to come out on top in the end.
Make Sure You Colour Between the Lines
When trading a trend, you need to have it in mind that you are colouring between the lines. When a market approaches resistance, you should be prepared for a drop, but when it approaches support, then the market is about to rise. The exciting thing about trending markets is that the timeframe you are looking at does not matter, so you can easily spot trends. A trend can turn in a two-minute chart as much as it can turn in a one-hour chart. An excellent example of this is the chart below.
It is easy to identify trends but not so easy to know how many pips you would risk or gain. However, as time goes on, this is a skill you will acquire as you continuously trade.
Take a Guess
One impulsive way to trade is to trade on the news, which can be risky due to other factors associated with the new released; therefore, you must prepare ahead of time. You have to make sure that your trade is placed before the news hits; that way, you are better prepared. You can also guess as to where the market is headed even before a related news release. Experts also publish expectations for news releases, which is something you can also make use of. If these expectations are met, traders should not expect a very big move. If the announcements are outside our expectations, then there could be a significant move. This is one good way to make the best out of volatility trading.
Do Something Different
With the fear of a loss while trading, traders often do things alike. Now, compared to doing things the same way others have, instead of trying to pick out where the market might turn, it is better to poach that particular level and trade the breakout.
The key is to find the level you want to exploit, set up an order before the market gets there, and keep your targets and stops within close range of the spikes. This sometimes means looking to get up to 20 pips or less on a currency pair that usually moves close to 100 pips daily. We know that breakout trends are quick and require you to be alert, but with the stress attached to it comes a countless number of great opportunities.
Bottom Line
Volatility trading is something to be embraced rather than feared, but the percentage of traders who want to trade using volatility is very low. Why, you might wonder? It is not because of market factors, but because of the herd trend with traders. The majority do not want to go into volatility trading because of fear of loss.
One thing you should be concerned with is getting the right information and using it properly. The reality of the possibilities attached to volatility trading are numerous, and it is important you take the time to slowly and steadily make the best out of it.
Use the tips highlighted in this article to start excelling in volatility trading today. These tips have been tested and are trusted by many expert traders, making them a good option.