On March 3, Reuters reported that the euro had hit a 21-month low over concerns that the ongoing events in Ukraine will hurt European growth. Reuters also stated that Brent crude futures jumped to a seven-year high of $115.11 a barrel.
All market investments carry a degree of risk and as recent events illustrate, market volatility can be unpredictable and conditions can evolve rapidly.
Chris Weston, Head of research at trading platform Pepperstone, says that one way investors can mitigate exposure to market volatility is by achieving the correct position sizing.
“Arguably the biggest mistake is not reacting to increased range expansion and adjusting the necessary risk on the position,” he says.
Increased movement can result in either overtrading or irrational actions.
“Achieving correct position sizing, not just relative to the size of the account but also to the volatility in the market, will keep you in the game for longer and is a cornerstone to any robust trading process - if the market is moving more aggressively (typically from a mean) we require wider stops which means taking down the position sizing to compensate for the additional risk.”
Weston says that investors should also have a clear trading plan that accounts for market volatility and avoid making hasty or irrational decisions. “Increased movement can result in either overtrading or irrational actions driven by emotional decisions – panic and fear can kick in and lead to diverting from the trading process – this can lead to a loss of edge. The trading plan should have conditions for dealing with higher volatility and one’s emotional state.
“We can also see one’s time in the market may alter too, and the duration in a position may decrease – unless purely systematic this may not suit as it can often mean they have to be in front of the screens far more intently and react more aggressively to price action.”
While market volatility can also be seen as advantageous in certain trading scenarios, Weston believes that many investors can be ill-prepared for such eventualities. “Most traders wish for volatility, but when they finally get it, they don’t have the game plan to correctly deal with the changes in market behaviour. One’s risk and position sizing must be driven by changes in volatility – adapt and you can survive and even thrive.”
It’s every trader’s personal responsibility to educate themselves about financial markets.
Ownership of risk
Daniel Takieddine, CEO MENA, BDSwiss, says that traders should be aware of the risks before making decisions about their investments. “Educating our clients on both the benefits and risks of trading helps streamline client-awareness with transparency, helping them better understand the essence of financial markets, as well as the broker they are trading with.”
He says that BDSwiss offers a number of educational resources to its clients but that ultimately, the trader needs to take ownership of their decisions. “While it’s every trader’s personal responsibility to educate themselves about financial markets, BDSwiss offers clients a set of easily accessible comprehensive educational materials and trading tools. Our materials are available in various formats, including daily market analysis, live webinars, weekly outlooks, special reports, etc. Our traders also have access to a suite of innovative trading tools, such as Trading Central, Autochartist, Trade Companion and more.
“Our teams work relentlessly on building meaningful relationships with our clients by offering them access to top-tier research and education facilities, leading trading platforms and tools, as well as 24/5 multilingual customer support that helps answer queries and solve problems along their trading journey.”
The feeling that “I am missing out on great returns” will probably lead to more bad investment decisions.
Speed of execution
Piyush Parekh, Chairman of FastOne Global Financial Markets Ltd, says that sufficient liquidity and speed of execution can be advantageous during periods of market volatility. “While market volatility is inevitable, it is something which can be taken advantage of or the risk of which can be minimised by offering quick trade execution and deep liquidity by way of bigger top of the book size,” he says.
“That is what we at FastOne do. A trade, though well thought of and timely placed, if not executed, puts the customer in a miserable situation of not being market participant and that is something which FastOne will try to avoid under all circumstances.”
Parekh says that traders often react to short-term fluctuations in markets, increasing their risk to sudden change. “Many investors and forex traders select asset classes, strategies and funds based on a current market movement and one-off strong performance. The feeling that “I am missing out on great returns” will probably lead to more bad investment decisions than any other single factor.
“One way to deal with volatility is to avoid it altogether - this means staying invested and not paying attention to short-term fluctuations. Impulsive trading leading to entry and exit at the wrong time, excessive use of leverage leading to frequent margin calls and booking small profits while accumulating losses are a few more areas that traders should be careful about during times of high volatility.”