Tips for trading volatility

Volatility can be very attractive to traders – it offers an opportunity for quick profits if you are willing to take on greater risk. When markets start to become volatile, here are some tips to help you stay profitable while minimizing risk:

1. Use Trendlines
2. Don’t Just Follow the Crowd
3. React to News in Time
4. Focus on Filling the Gaps
5. Don’t Be Afraid to Take Risks

Use trendlines

Trendlines are a very valuable tool when trading volatility. They help you ignore market noise and focus on the main trend, even when the market is going through significant fluctuations.

Before opening a position in a volatile market, it is a good idea to draw a few trendlines to get a clear overview of the overall trend. It is also important to identify key support and resistance levels – remember, a level that was previously support may later act as resistance, and vice versa.

Don't just follow the crowd

One of the main causes of market volatility is the so-called herd mentality.

As more and more traders enter a position in an asset, its price moves higher. This leads other traders to join in, further fueling the trend.

While trading on these trends can be profitable, it is not wise to trade solely due to FOMO (fear of missing out on an opportunity). Instead, you should conduct thorough research and assess the situation. When the herd mentality shifts, the market can quickly reverse direction.

Of course, you may also take the opposite view if you believe the trend is unjustified. However, markets can remain irrational for a long time, so trading against the trend should be carefully considered and in line with your trading plan.

React to news promptly

When significant events occur in the market, such as NFP releases, interest rate announcements, or other important news, it may be wise to avoid trading in these markets. However, if you decide to take advantage of these events for trading, it is important to open your position before the data release itself.
To succeed, you must conduct thorough research to understand how the specific news will impact the markets you are trading.

It is also advisable to check other related reports that could give you a hint about how the market will behave. For example, when trading NFP, you might look at ADP employment reports, jobless claims, and other factors that could influence the final numbers.

Once you can accurately estimate where the news could lead, you can adjust your trading strategy accordingly. However, keep in mind that analyst expectations might already be priced in. If analysts have predicted the outcome correctly, volatility might not be significant.

Focus on gap filling

Markets can experience jumps between different prices during the closure of trading overnight or over the weekend. After such jumps, gaps are often filled when the price returns to the previous closing price.

In the case of AUD/USD, over the weekend, the price dropped by 35 points due to negative economic news from China. However, during the next 12 hours, the price increased again and returned to its original level.

A simple way to trade volatility is to look for these gaps and trade with the expectation that the price will return to the level before the gap. However, like with any trading strategy, this is not guaranteed. Therefore, it is essential to remember to set stop-loss and take-profit orders at reasonable levels to protect your capital.

Don't be afraid to take risks

Trading around major economic events can be an exciting way to capitalize on market volatility. Announcements of economic reports can lead to significant price movements, offering both opportunities for profit and risks. Therefore, it is crucial to prepare in advance.

One of the key strategies for successful trading is to place your trade before the official release of the report. This involves the ability to make an informed prediction about the direction the market might move, based on expectations and assumptions.

An example of this strategy could be trading around the U.S. non-farm payrolls (NFP) data. USD/JPY is usually very sensitive to this economic data: if the data is weak, USD/JPY tends to drop, while strong data causes the price to rise.

Before the release of reports like NFP, analysts publish forecasts that provide insight into expected data. These expectations are important because the market may have already priced them in. If the expectations are met, a large price movement is unlikely. However, if the report significantly exceeds or falls short of expectations, it could cause a sharp price shift.

There are also other economic indicators that measure employment and provide clues about what to expect from the main release, such as the NFP. By combining data from these prior reports, we can get a better understanding of what the final numbers may reveal.

Since the anticipated estimate was incorrect, it would be logical to sell USD/JPY before the report is released. Of course, it’s crucial to set stop-loss and limit orders, as managing an incorrect estimate properly is essential to protect your capital.

The NFP report is not the only one that can be utilized in this way. For example, you could collect consumer confidence data to predict U.S. retail sales or analyze inflation data to estimate the stance the central bank will take on monetary policy. The possibilities are practically endless.