Over the last 20 years, it seems that about every six to eight years the financial markets experience severe bouts of turbulence. These episodes of trading volatility, in my estimation, are probably going to become even more frequent as the global economy becomes more intertwined and information is disseminated at light speed.
For the average investor, these spikes in trading volatility can be harrowing as they see their stocks and mutual funds going through wild fluctuations while prices go mostly lower. The average trader also finds this type of environment challenging because the rate of change can be so dramatic that reacting to such price movement usually results in several losses.
In addressing these changes in market volatility, the first question I get asked is if there is a different strategy that should be implemented for such extreme conditions. The simple answer is no. The core strategy of supply and demand never changes regardless of market conditions. The only aspect that changes is the velocity of price movement; and the levels do become a bit wider.
On Monday August 24, the E-mini S&P futures contract was down a whopping 100 points as we were nearing the open of the New York Stock Exchange. Conventional thinking was telling us that it was a crash or just to hang on despite the fact that fear was rampant, and it was difficult not to get caught up in the group thinking. If, however, you have a simple, objective, rules based strategy that you are following, you would have noticed that the ES (E-mini S&P) futures contract was approaching a 240 min demand zone (shown in the chart below). This indicates that there was a high probability that the ES would bounce from there.
Notice I say probability; I always have to address this with potential traders. You must remember that this game is all about measuring odds and that there are never any guarantees. Also, that if it doesn’t hold we take small losses. Lastly, the fact is that nobody knows for sure what will happen next so that’s where a sound, proven strategy comes into play. The reason I bring this up is because many will be asked, “How do you know which level to choose when there are so many I see?” The answer goes back to the specifics in the core strategy we teach here at Online trading Academy. In the next image we can see that the market did indeed bounce from this level. Please understand that there’s no silver bullet here, just a picture that represented true supply and demand.
Because the supply and demand levels do become wider in this environment, the only adjustment to be made for the short-term trader is to reduce their contract size and take entries on smaller time frames.
As I noted earlier, it is unfortunate that so many people suffer in markets with high trading volatility because, quite honestly, they don’t truly understand the dynamics of supply and demand or how the institutions manipulate the markets to suit their needs. The simple fact is, that in order to change one’s results one must change their perception and how they think about trading and investing. Otherwise, the high volatility will continue to wreak havoc in a trader’s psyche and account balance.
This content is intended to provide educational information only. This information should not be construed as individual or customized legal, tax, financial or investment services. As each individual's situation is unique, a qualified professional should be consulted before making legal, tax, financial and investment decisions. The educational information provided in this article does not comprise any course or a part of any course that may be used as an educational credit for any certification purpose and will not prepare any User to be accredited for any licenses in any industry and will not prepare any User to get a job. Reproduced by permission from OTAcademy.com click here for Terms of Use: https://www.otacademy.com/about/terms
Editors’ Picks
AUD/USD: Extra gains in the pipeline above 0.6520
AUD/USD partially reversed Tuesday’s strong pullback and regained the 0.6500 barrier and beyond in response to the sharp post-FOMC pullback in the Greenback on Wednesday.
EUR/USD meets support around 1.0650
EUR/USD managed to surpass the key 1.0700 barrier in response to the intense retracement in the US Dollar in the wake of the Fed’s interest rate decision and Chair Powell’s press conference.
Gold prices skyrocketed as Powell’s words boosted the yellow metal
Gold prices rallied sharply above the $2,300 milestone on Wednesday after the Federal Reserve kept rates unchanged while announcing that it would diminish the pace of the balance sheet reduction.
Ethereum plunges outside key range briefly as US Dollar Index gains strength
Institutional whales appear to be dumping Ethereum after recent dip. Fed’s decision to leave rates unchanged appears to have helped ETH's price recover slightly. SEC Chair Gensler has misled Congress, considering recent revelations from Consensys suit, says Congressman McHenry.
The FOMC whipsaw and more Yen intervention in focus
Market participants clung to every word uttered by Chair Powell as risk assets whipped around in a frenetic fashion during the afternoon US trading session.
RECOMMENDED LESSONS
Making money in forex is easy if you know how the bankers trade!
Discover how to make money in forex is easy if you know how the bankers trade!
5 Forex News Events You Need To Know
In the fast moving world of currency markets, it is extremely important for new traders to know the list of important forex news...
Top 10 Chart Patterns Every Trader Should Know
Chart patterns are one of the most effective trading tools for a trader. They are pure price-action, and form on the basis of underlying buying and...
7 Ways to Avoid Forex Scams
The forex industry is recently seeing more and more scams. Here are 7 ways to avoid losing your money in such scams: Forex scams are becoming frequent. Michael Greenberg reports on luxurious expenses, including a submarine bought from the money taken from forex traders. Here’s another report of a forex fraud. So, how can we avoid falling in such forex scams?
What Are the 10 Fatal Mistakes Traders Make
Trading is exciting. Trading is hard. Trading is extremely hard. Some say that it takes more than 10,000 hours to master. Others believe that trading is the way to quick riches. They might be both wrong. What is important to know that no matter how experienced you are, mistakes will be part of the trading process.