Investment Strategies for Extremely Volatile Markets

Volatile markets can be very challenging to navigate. At the same time, they offer great opportunities for outsized profits. In this article, we’ll discuss key things that will help you stay the right course during times of extreme volatility.

Always Stick to Your Plan

Trading always requires planning. A proper plan becomes even more important when markets are volatile since traders have to react quickly. It is important to stick to your original plan during big price swings, as they cause big emotions. Make sure that you are well-prepared before you make a trade. Once you have established a position, you may have little time to analyze the market’s movements, so you should just stick to your original plan. Changing plans “on the fly” often leads to poor results.

Adjust Your Position Size

Extreme volatility provides traders with a chance to win big. But, losses may also be significant if your trade goes the wrong way. In this light, it is important to limit your position size to successfully survive volatility and profit from the opportunities it provides. Some traders feel the urge to increase their position size when they feel that markets are ready for a big move. You should resist this temptation. If you see several opportunities, you’d be better off taking several positions of limited size rather than betting big on one trade.

Use Limit Orders

As the market situation changes fast, it is extremely important to get the correct price for every entry. Thus, you should only use limit orders. You can place such orders a bit above (or below, depending on the direction of your trade) the market to increase your chances to get into a trade at times of huge volatility, but you should not be too generous. A good price is a very important component of a successful trade. It is better to avoid getting into a trade altogether than to get into a trade at a price you weren’t expecting.

Use Wider Stop Loss Orders

When markets move fast, prices can easily breach key levels even if these levels are strong. Stop loss orders should be wider if you want to avoid being stopped out of a good trade – your trade need some room to “breathe” when the market is volatile. If you have adjusted the size of your position and stayed within the limits of your usual risks, wider stops will not cause problems.

Watch Your Leverage

Leverage is a two-edged sword. It helps you make more money in a winning trade, but it also bites hard when the trade goes in the wrong direction. Be conservative with leverage when markets are volatile. Volatility itself will provide you with a great opportunity to make money. Attempts to artificially increase potential profits by using excessive leverage may hurt your trading account if the market suddenly turns against you.

Focus on Short-Term Trades

Markets can move very fast in both directions at times of extreme volatility. Thus, traders should focus on short-term trades so that they can take their profits off the table before the direction of the instrument changes. Even traders who are comfortable with calm, positional trading will be better off taking at least some profits when their trade goes in the right direction in volatile markets.

Exit Your Positions in Parts

There is no magic indicator that will show you when the market is changing its direction if prices are changing very fast. You should exit your positions in parts to increase your chances of taking advantage of the instrument’s move. This tactic will also help you limit losses (or avoid them) if the trade went according to your original plan but then suddenly reversed course.Besides, it will be easier to sit through major swings if you have already taken some money off the table.

Breakthroughs Typically Work Well In Volatile Markets

Extreme volatility is a time when market moves are very strong. Thus, instruments easily breach levels and attract more speculative traders which is good for the continuation of the move. Going with the market’s momentum will work better in the majority of cases in this environment. False breakthroughs will also occur, but the percentage of false breakthroughs will be lower than at times of calm, range-bound markets.

Don’t Catch Falling Knives

As we have discussed above, momentum is a major factor in volatile markets. As they say, the trend is your friend, and this is especially true at times of volatility. While “bottom picking” may look attractive as it promises outsized profits, risks are often too big when markets are volatile. Furthermore, it is much more difficult to determine the potential bottom when prices are moving very fast in comparison with ordinary times.

Do Not Trust RSI And Similar Indicators When Markets Move Fast

By definition, volatility causes outsized moves. Thus, instruments will become overbought or oversold, but it means nothing in such an environment. Time and time again, you will see that an “overbought” instrument is rallying if momentum is strong, while the “oversold” instrument keeps dropping like a rock. Watch momentum and key levels and do not worry about indicators screaming “overbought”/”oversold”. Such indicators work much better in calmer markets.

Once A Major Level Was Breached, Minor Levels May Have Little Impact on Trading Dynamics

When markets are extremely volatile, you should focus on key technical levels. Minor levels, which may have served as material obstacles during calm times, will be ignored in most cases. That’s the nature of volatile markets. Price swings are big, and only major levels count.

Bottom Line

Stay calm and focused despite extreme volatility. Have a plan and stick to this plan. Do not be greedy – take smaller positions and use wider stops. Do not forget to take some profits off the table if your trade is going in the right direction. Follow momentum and don’t try to find the ultimate top or bottom. Extreme volatility is a time of opportunity – use this time wisely.

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