Do you find yourself having a tough time coping with the markets when they are extremely volatile? With the prices swinging wildly, it might be challenging for you to stay consistent with your planned trades.

Are you becoming indecisive over what course of action to take next?

 If so, you’re not alone. Trading in highly volatile times is something that many traders struggle with. But, with the right strategy and understanding of how markets behave during times of high volatility, you can take advantage of the market volatility and make wise decisions that move you closer to achieving your financial goals. 

How to trade during high volatility

In this blog post, we will take you through a step-by-step process on how to trade when the market is highly volatile.

Step 1: Understand What High Volatility Means

 High volatility means that the price in the market is moving fast.

These big jumps are triggered by many different kinds of events, such as new data releases, news about a war, or a flip in sentiment.

For instance, the stock market was highly volatile at the beginning of the COVID-19 pandemic because traders were uncertain about the impact that the new virus would have on the global economy. The more you learn about what drives these events, the more prepared you’ll be to tackle the market.

Step 2: Choose the Right Assets for High Volatility

 When you’re selling in a choppy market, you want to make sure you’re trading the right stuff. Some are better than others. 

Here are some of the safest: 

1. Foreign currencies. Foreign exchange markets are the biggest, most liquid markets in the world, and, in the midst of a choppy market, they respond to the same safe-haven rallies and risk-on selloffs that equities do. A lot of people like to argue that currencies are too volatile to be an effective safe-haven play, but I think this is an oversimplification. 

2. Commodities. This may sound counterintuitive, but the same safe-haven rallies and risk-on selloffs that send foreign exchange markets higher or lower also benefit commodities. So, gold and silver are good choices for this kind of market. 

3. Emerging market equities. It’s a well-known fact that foreign exchange markets and commodities tend to benefit from safe-haven rallies, and, when that happens, emerging market equities tend to rally too. This is because trading currencies and commodities is considered a speculative activity, and speculation takes place mostly in emerging markets.

4. Long-term bonds. These are probably the safest investments to own in a volatile market. When things get rough, investors flock to long-term bonds and drive down their yields. From there, the only direction these bonds can go is up.

 5. Treasury Inflation Protected Securities (TIPS). These are like long-term bonds, except their principal rises with inflation.

 – Safe-haven assets: like gold, the US dollar, or government bonds, these tend to do well when volatility is high. For example, gold prices rose during the 2008 financial crisis.

 – Volatility ETFs: Exchange-traded funds (ETFs) that track instruments such as the VIX, and then pass through the volatility to the ETF itself, provide a third way to profit from high volatility. These products are designed to increase in price when volatility increases.

 – Defensive Stocks: stocks in sectors such as utilities, health care and consumer staples are less affected by market swings. Utilities providers, medical suppliers and consumer staples are typically less volatile, because they provide utilities that are necessary for people’s lives.

 But by honing in on those factors, you might be able to mitigate risk and exploit opportunities associated with volatile markets. 

Step 3: Diversify Your Portfolio to Mitigate Risk

 As a basic rule of trading, it’s always good to diversify. This approach is even more important during times of high volatility. By owning a mix of different asset classes, you can lessen the chance that you’ll take a huge loss if one area of the market performs poorly. A well-diversified portfolio – say, one that owns some stocks, bonds and commodities – is much less likely to get whipsawed by volatile markets than one that’s concentrated in just one asset class. Diversification can’t eliminate risk, but it can help moderate the dizzying effects of wild price swings.

Step 4: Use Technical Analysis to Navigate High Volatility

Technical analysis, on the other hand, uses historical price data, charts and other indicators to predict future price movements. It is particularly effective in identifying entry and exit points in highly volatile markets. Just as the RSI signal above can be used to determine a break-out of a trend, there are various technical indicators that can be used to make trading decisions, such as moving averages, Bollinger Bands or the RSI. 

Of course, technical analysis comes with many caveats (especially in highly volatile markets), but if used properly, it can be quite effective.

Step 5: Implement Risk Management Strategies

 High volatility means you also have more potential for massive price swings, so risk management becomes all the more important. Here are a few risk management strategies:

 – Stop-Loss Orders: These sell an asset once it reaches a certain price, preventing you from losing money. If you buy a stock at $100 and set a stop-loss at $90, you’ll be out of the trade if it falls to $90, limiting your losses.

 – Position Sizing: Determine how much capital to risk on each trade depending on the size of your portfolio. For example, you might be willing to risk no more than 2%of your portfolio on any one trade. This can reduce the risk of a catastrophic loss.

 – Hedge Your Bet: if you take an offsetting position to reduce your risk, you’re hedging. For example, you could buy a put option on a stock you already own, which goes up in value if the price of the stock falls, reducing your potential losses.

 These tactics can help you live with risk in periods of high volatility. 

Step 6: Stay Informed About Market News and Events

 The other thing you need to do is keep abreast of what is happening in the market and the world. There are events that are major drivers of volatility. For example, a major central bank decision to raise interest rates can cause global stock prices to tumble.

So, knowing what is coming down the pike will give you the opportunity to trade the event. For example, you can sell stocks ahead of a Federal Reserve decision in order to lock in profits, or buy them back after the event in case prices drop.

This does not mean you need to change your strategy every time you hear a news bulletin, but a little advance knowledge of what is happening can give you the edge.

Step 7: Maintain Emotional Discipline

 High volatility can elicit strong emotions, which can prompt you to make impulsive decisions about your trading. In order to succeed in a highly volatile market, you have to be emotionally disciplined. You have to stick to your trading plan, and not make decisions based on fear or greed. 

For example, if the market suddenly drops, you might be tempted to sell all your positions in a panic. But doing so could lock in losses that you might have been able to avoid if you had stayed calm and stuck to your trading plan. 

By being patient and disciplined, you’ll be better able to survive the highs and the lows of high volatility. 

Step 8: Use a Demo Account to Practice Trading

 If you’re just starting out and trying to learn more about trading, or you already have strategies in mind and want to test them in a highly volatile environment, the best way to do so is with a demo account. Opening a demo account can let you trade in real market conditions but without having to risk real money. 

Many online brokers, for example, provide demo accounts that simulate scenarios of elevated volatility so you can practise trading and hone your strategies. Following this course of action can help boost your confidence and prepare you for trading real money in a volatile market.

Step 9: Be Prepared for Market Reversals

 High volatility also means that reversals (prices changing direction) are more sudden and sharper. This can be seen, for example, in the 2016 Brexit referendum, where markets initially dropped on the news of the vote to leave the EU, and then recovered in the weeks that followed. Reversals are a significant risk for traders, so it is important to have a plan in place to deal with them.

This could involve setting stop-loss orders, changing your portfolio weightings, or using technical analysis to identify where a reversal may be most likely. If you do this well, you will be better prepared to respond to market reversals if they do occur.

Step 10: Trade with Finxo Capital for a Comprehensive Experience

 Finding a suitable trading platform with high volatility is very important.

Finxo Capital provides a user-friendly interface, competitive fees, and a wide range of trading instruments. This means that you can work both with a brokerage account (e.g., MetaTrader 4) and a cryptocurrency exchange (e.g., Binance).

Finxo Capital will provide educational resources for you, like webinars and market analysis on how you can anticipate and navigate high volatility. In addition, Finxo Capital will provide 24/7 customer support to help you with any questions or problems you have.

 Finxo Capital provides all the resources and tools you need to make informed decisions, but trading always carries risks and the outcome of your trades will be determined by your strategy and risk management. 

Finxo Capital is at your disposal, but the outcome of any market scenario will be determined by your actions as a trader. 

Best Trading Practices and Risks Involved

Trading when the market is really moving can be frustrating but it can also be very profitable. If you want the best chance at success, stick to the best practices and be aware of what you are up against. 

Best Practices:

Do Your Homework This may seem obvious, but it’s vital. Never make a trading decision without first researching the market, the assets, and the economic indicators that influence those assets. For instance, if you’re looking to trade a basket of stocks that tend to exhibit high volatility, a quick glance at historical data can provide you with a cursory picture of how it occurred in the past.

 Set Appropriate Goals: Target achievable goals in accordance with your risk appetite and trading experience. For example, if your clear objective is to make 10% returns in a period of heightened volatility, make sure it is in line with your overall trading strategy and prevailing market conditions. 

 Be Objective: Try to avoid letting emotions cloud your judgment. Many traders are undone by their inability to stop emotional trading. Stick to your plan (see below) and don’t make decisions out of panic or greed. For instance, when the market dips suddenly, it can be easy to sell out of fear, not realizing that you’ll lose money in the process. Keep your eye on the long view and stay disciplined.

Risks Involved:

 – Market Volatility: Very high volatility can result in big price swings in the markets, which can give rise to great opportunities but can also result in large losses. For example, a stock that shoots up in price in the morning could crash by the afternoon, catching some traders by surprise.

 – Liquidity Risk: When volatility is high, some assets become less liquid, meaning that, if you try to buy or sell, you might not be able to get the price you want. When you trade, pay attention to liquidity risk, and plan your trades so that you don’t find yourself unable to exit a position when you want to. Liquidity risk can result in you not getting the price you hoped for, or not being able to exit a trade at all.

 – Psychological stress: high-volatility trading is mentally taxing, and can lead to stress, decision fatigue and bad decisions. Recognize this risk factor and take breaks when you start feeling overwhelmed. 

 With these best practices and risks in mind, you can trade better and ensure your investments remain secure during high volatility and unexpected market changes. However, remember that trading is risky, and it is not a guarantee of any profits or success. 

Although trading in high volatility is not an easy thing, with the right strategies and mindset, you can execute your trading. High volatility does not always mean bad news.

Understanding what high volatility means, picking the right assets, diversifying your portfolio, and applying the right risk management strategy, can put you in a good position to trade with confidence and protect your investment. Keep in mind emotional discipline, lifelong learning, and be prepared, so you can thrive in a high-volatility environment.

Now, with Finxo Capital, you have all of this at your fingertips.