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Trading Volatile Markets

How to Trade in Volatile Markets

In trading, a volatile market is one which experiences a lot of change within a relatively short time span. Traders are attracted to markets because of their volatility; when change is what you profit off of, it makes sense you would want to find a market which provides you with a lot of opportunity. On the same token, many traders are intimidated by volatility—what you can win quickly, you can lose just as quickly after all.

In reality, “volatility” is a pretty broad term. Perhaps what we’re more interested in as traders is what form volatility takes. Is the market trending, or is it consolidating?

For most traders, trending markets are far easier to profit in. These are the markets which are making those big moves up or down which so many traders are looking for. If you can get in on a nice big move early on, you can ride that move out and make some great profits. This kind of volatility won’t usually cause you a lot of trouble if you set stop losses, and especially if you trail those stops as you ride out a trend.

On the other hand, consolidating markets are what destroy most would-be traders. These are the choppy, uncertain waters that many traders have no method for profiting in. Now here’s the real catch with trading: Most of the time, the market is consolidating. That means if you don’t know how to profit (or at least break even) during consolidation, you are going to have a hard time making it. If you can learn how to profit during consolidation, you will probably become successful!

What you want to watch out for the most is choppiness. Consolidation isn’t always choppy, and it’s not bad to trade it when it’s predictable. Sometimes price makes a lot of small, volatile shifts though, with no particular pattern or direction. You get a lot of false signals, and if you trade them all, you’ll probably lose a lot of money. Remember that tips for short term trading can also be rewarding when operating in market volatility.

How do you profit in choppy markets? The best answer is probably: Don’t trade. Wait a few minutes, hours, days, or weeks, and conditions will change. Switch to another currency if you have to for a while. Wait for a great context first, and then a great setup—and then you’ll be profitable!

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