Forex Volatility Spikes – What Should Traders Do?

After a few years with stable currency valuations, things had started to evolve the other way around, now that market participants are starting to price in a severe economic slowdown, due to the latest coronavirus outbreak. The forex market is active again and central banks had already taken actions to prevent any liquidity shortages. That means that we, forex traders, should also take some precautions and today we’ll talk about that.

# Think about your risk profile

If you haven’t just started to trade forex, then you probably know a lot about your risk profile. Are you comfortable in trading exotic pairs, where volatility is very high, or do you perform better when price swings are more stable? If the lather is the case for you, then stick with the most popular pairs (EURUSD, GBPUSD, or USDCAD) because even there volatility should spike temporarily when central banks take action. Even those you are comfortable in taking bigger risk should reassess their market approach given that we face a situation that did not happen in decades.

# Reduce trade size

Given the market moves impulsively on either side, there’s no point in taking huge risks by opening large positions are usual. This is the time to think about risk management and limiting your exposure. By reducing your trade size in half, as compared to your usual regime, you’ll manage to navigate unexpected market moves in a calm manner. At the same time, any eventual losses will be smaller, and you won’t be hijacked by any emotional reactions. Alongside with reducing trade sizing, trade frequency should also be considered. You may lose some trading opportunities, but remember professional traders always put risk ahead of the potential profits.

# Place higher stop losses

With markets showing such high swings, it will be impossible to enter the market and then see your trades in profit all the time. It’s not impossible, but the likelihood of that happening is smaller. You may be right in your technical analysis and the market will move against you before acting as you’ve anticipated. In order to reduce events like this, it will be better to increase the stop loss size. Combined with a reduction in trade size, your risk will remain relatively the same.

Summary

All three recommendations are aimed at protecting your capital during uncertain situations. It will be better for your long-term forex performance to have a conservative approach, at least until the volatility will start to settle.

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