You’ll read a lot about the advantages of trading currencies – yet most traders tend to turn advantages into disadvantages – due to a lack of understanding. That’s why 95% of currency traders lose money – and there’s one thing in particular that wipes out more trader equity than anything else – volatility! Most forex traders simply can’t deal with volatility.
Volatility, Deal with it or lose Money
Currencies are volatile, and in theory you can trade for thousands in profits every day, but the reality is:
Most traders make fundamental errors when trying to deal with volatility – and they’re wiped out. The main error they make is with stop placement. These traders are so keen to avoid risk, that they actually create it. They do this by placing their stops incorrectly – thus giving themselves no chance of winning.
Volatility is also more of a problem to deal with when you use leverage. Many forex brokers will grant up to 400:1 leverage – and if you can’t deal with volatility, then leverage simply compounds the problem.
Many forex traders are great at picking market direction, but these traders are continually stopped out by volatility. They’re frustrated when they get stopped out – and then see the trade go onto make $10,000 to $30,000 – and they’re not in!
Today, in our world of instant communications, currencies are more volatile than ever before. While you can see the big, long-term trends on any forex chart, the volatility within these trends is huge. This volatility will soon take your equity – if you don’t have a forex trading strategy to combat it – and lead you to currency trading success.
If you want to succeed in forex trading, then you need to deal with volatility, so here are some tips to help you:
1. Do you know what standard deviation is?
If you don’t, then look it up on the net right now – or read our previous articles. If you want to deal with volatility, then an understanding of standard deviation is a necessity.
2. You Need To Take Calculated Risks
Most traders have their stops too close, and although they appear to have a lower risk, the fact is that the odds are heavily in favour of their stop being hit. It may look a low risk on paper – but it’s almost a guaranteed loss in practice – making it high risk.
A perfect example is the forex day trader – who thinks they can place stops using daily support and resistance – and keep risk low. However, all volatility is random in short time periods – so they say goodbye to their equity.
If you want to win at trading, then you need to be like a successful gambler – bet big when the odds are in your favour – and don’t bet, when they’re not.
Only place stops behind valid resistance and support – and be VERY selective with your trading signals.
3. Accept Drawdown in Open Equity
When trailing a stop, be patient – you need to keep it back far enough, not to be taken out by market noise. This is hard when you see thousands in equity wiped out in a day. However, keep your currency trading system firmly focused on the bigger prize – and accept that you’ll have to take losses in the short term – to make longer term meaningful gains.
Volatility in forex trading is a huge advantage – but you must learn to deal with it correctly, in order to achieve currency-trading success. If you can’t deal with volatility and risk, then you’ll lose money – it’s that simple.
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by Stephen Todd