Instability has increased dramatically over the last few weeks. Although this nature up and down has been common over the last 18 months, it has now increased. We saw huge strokes of hundreds of pips; USD / JPY fell 1,000 pips in just eight trading days, while GBP / JPY lost 1,500 pips in the same time period.
It is dangerous to trade in such unstable forex markets, and some traders may withdraw, but there are also good opportunities for big profits. After all, we are forex traders and profit is what we are here for! We should also take into account that there is always a risk in this business. High volatility should not strategically deter us from trading forex. That said, we need to have a trading plan. Over the last 2-3 weeks we have had to change our trading rules to be successful in such times.
It is difficult to trade in an unstable market, but with the right forex strategy you can be profitable
Do not try to catch a falling knife
This rule applies to day-to-day foreign exchange trading strategies, and in particular volatility trading; if the price is falling hard, don’t panic and rush to fix everything. You cannot influence price movements and change market direction. If in real life you try to grab a knife, you will probably cut your hand. In Forex trading, if you try to catch a falling market during high volatility, you are likely to halve your profit.
So don’t be a hero trying to pick tops or bottoms. You never know where the market will get to the bottom. If you think a 5 cent drop in a few days is enough and the drop is excessive, wait a moment and think again. See the GBP / JPY chart below.
After a 600 pip drop during the first week of extreme volatility, you would think the drop is over. The price is at 100 MA, stochastics has been exaggerated for several sessions, and the RSI indicator has just touched the oversold line. Well, the next week was even crazier and the price kept slipping for an extra 900 pips. Does anyone have such deep pockets ?! So, the first rule in volatility trading is: do not try to pick peaks and troughs under extreme volatility.
Get rid of the noise
I keep a few moving averages and other technical indicators on my charts when I trade daily. They are very useful at the usual time, showing when the market is overbought / resold, etc. But when the market panics, those indicators are worth nothing. You could have three trend lines, four moving averages, RSI and stochastic indicators on a clock or H4 chart – they all show that the forex pair is exaggerated – but in those conditions you can’t trust them.
When the market is extremely volatile, you should look back at large levels and get rid of noise. Level 116 was an important level of resistance in USD / JPY and was maintained several times. When the Chinese mini-stock market crashed in August 2015, the price stalled at that level. It makes sense to ignore small intraday levels and concentrate on large ones. Two weeks ago, when we witnessed another such downturn in the forex market, I focused only on this level. When it finally broke, I stopped thinking about buying more because the positions shifted and the bears took control. This leads us to the following volatility strategy: start with a break.
Start with a break
Large technical levels are important in forex. Many traders rely on them and open positions when the price gets close enough, stopping only on the other side. But when a large level, such as level 116 in USD / JPY, collapses, then all confidence is lost and a lot of buying positions are closed (apart from triggered stop losses).
Now, imagine this happening when the forex market is already in a panic. Panic multiplies and instability becomes extreme. Let’s take another look at the USD / JPY chart; level 116 was maintained several times over a period of 14-15 months. However, just over a week ago during extreme volatility, that voltage level finally eased and there was a 500 pip drop. So in volatility trading, when a high level breaks during unstable times, you just take a break. It is very easy to panic at such a time, and that pushes the price further.
Think big and milk the store
When volatility is extreme, it is not the time to scalp or trade small time frames. Levels of 20 or up to 60 stop losses are readily available when the daily range is 300 pips. How many times have we seen the price move 50 pips in minutes? It is therefore reasonable to expand your goals only on such occasions.
At FX Leaders, one of our strategies for trading volatility is to increase the number of when volatility increases and decreases to short-term forex signals. You have to think big when the price ranges from 500-700 pips per week. As we said above, the best strategy for trading volatility is to choose high levels of resistance / support and let price and volatility do their job – just remember to make it easy. You don’t even have to be extremely patient because it doesn’t take that long for the price to shift from one big level to another.
If we look again at the above USD / JPY example, after breaking the support level of 116, it only took about two and a half days to trade the price to reach 111. So when volatility changes , hold an open position to change the trade as much as possible . Usually, when the price shifts by a few hundred pips in a few days, it doesn’t reverse so quickly. There are a few days of consolidation and a few signals, so there is time to judge and decide if the store will close.
As you can see, during extreme volatility there are opportunities to make money. It is true that it is dangerous to trade during these periods, but that is the nature of forex. However, there are methods to reduce the risk as we explained in this article. The trading strategy in this age is to think big, watch big levels and bigger time frames and just go on.