Uncertainty means more trading opportunities.
Here is two words that go well together – trading and volatility.
As a trader or investor you may be able to generate returns in a bear market or a bull market but you will find it very hard to generate consistent returns if the market is not going anywhere. In other words traders need markets to move and offer us a chance to get involved in a trend. We can even extend this and state that traders are slaves to volatility. This is especially valid for Forex traders as historically the currency markets are among the asset classes showing the lowest volatility levels. That being said we can easily see why traders get excited when they see volatility indices rising as that spells more trades and possibly higher return over the risk we take.
A quick look at the chart examples below will give you an idea of how important volatility is to the risk:reward aspect of your trades. And while there are many strategies that may be put to work in a range-bound market it is not a trading environment that provides high returns to risk taken. Images below show how a potential trading idea looks like in a trending market versus a trading idea to get involved in a range-bound market during low volatility.
Obviously every trader would prefer trading ideas that have the potential to generate returns that are 2-3 times bigger than the risk he takes. Unfortunately its us traders that must adapt to the market not the other way around so if the market decides that its not going to move we need to lower return expectations and tune our trading tools for a ranging market and low volatility. It is true that as long as the market stays inside its range we can generate lots of successful trades if we are good at identifying the range’s support and resistance – either technical or fundamental. That however does not change the fact that the risk:reward ratio of your trading ideas will be very conservative whereas a trending market may not just allow us to make higher returns but can also give us a chance to secure our profits and add more to a winning trade. You can try to add to a range trade during low volatility but the odds will be just stacked against you.
All of the above is here to suggest that as traders we should embrace turbulent times and global uncertainty. And what times these are: United States’ 45th president is a TV personality and real estate investor; United Kingdom decided to leave the EU, the same idea it helped to create; Germany’s political landscape is starting to shift towards far right, North Korean regime is escalating its nuclear threats. Add the middle east and other areas of ongoing conflicts and examples become so many that the media starts repeating one word that summarizes it all – Uncertainty. And the more that word comes across the more active the markets become.
So to keep this short we can say that traders should embrace volatile markets. We should be excited about new market trends.If you want to get a perspective of how the trends of the future look like just take a look at blockchain technology and crypto currencies. Bitcoin registered over 400% return just in 2017 while other crypto markets like Litecoin registered over 1700% return this year.
Whatever the asset class we are trading though we need to be aware of its average volatility and always incorporate market volatility measures in our trading ideas. If you have a fundamental idea to BUY Japanese Yen for instance, the Forex market gives you the option to SELL all major world currencies like the USD, GBP, EUR or CAD against the Yen, right? But why sell the US dollar against Yen when we can easily see that a sell of Pound Sterling against the Yen may give us much better return due to the higher volatility of GBPJPY?
Its the same basic idea of buying the Yen that can generate different returns when you apply volatility measures to it.
Wishing you successful trading!
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