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Don't Get Short Sighted by Market Volatility

Don't Get Short Sighted by Market Volatility

2014-10-22 17:58:00
Alejandro Zambrano, Market Analyst
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Talking Points

  • Market volatility will affect your mood and ability to make rational decisions
  • If the markets moves in ways you did not expected your body may will release stress hormones which complicates your trading
  • To avoid becoming a victim the markets and our own mood swings we need to plan ahead

Taking advantage of the financial roller coaster

Trading the markets is not particularly easy, and if anything, they are financial roller coasters. Price can trade aggressively higher or lower with an absence of news to back the move. Sometimes price will even trade in contradiction to common sense.

As there is a high number of random market moves, it’s not surprising that the average FX trader has been right 59% of the time according to our . This means that our next trade will be probably be a winner 59% of the time and a losing trade 41% of the time.Our winning ratio is near the outcome of a coin toss, in the short term, meaning there is no certainty if our next trade will be a winner or not.

If we take this fact and combine it with real money trading, then it makes sense that traders will experience strong mood swings, as any given trade can quickly generate a gain or loss.This also explains how greed and fear is part of the market.

The swings of the markets does complicate trading, but can also be an advantage to the trader that can keep their emotions in check.

The emotionally stable traders knows and acts like the next trade is just one trade out of many trades to come. One routine which can help traders to be less emotional is tohave a trading plan and understanding the key components of the trading plan.

Suggested reading: How to Build a Four-Point Trading Plan

Don't Get Short Sighted by Market Volatility

How our body can complicate things further

When the markets move in ways we do not predict, our body will react by producing hormones such as adrenaline, cortisol and testosterone which in turn place our body on high alert. The primary function behind the release of such hormones is to sharpen the senses and to prepare the body. As in the case of cortisol, to deal with the imminent stress by increasing blood sugar, supressing the immune system and increasing its metabolism. Although this can, in the short term, make us more alert it also reduces our ability to think ahead. As a result we may act less rational.

It is in this state of high alertness and stress that we tend to think less rationally, traders beginning to feel and behave as if it were their last ever trade. It is at this point that they begin to add to losing positions or refuse to cut their losses.

How can we limit the impact of emotions on our trading?

We should ultimately plan for different scenarios and create a plan contingent on such scenarios. Ideally this should be done before placing a trade, the reason being that we will be in our most objective state given that neither pride nor money is at stake. Minimally, good levels for our stop loss, profit target and entry should be worked out. When the time comes and our entry gets triggered, we must adhere to our rules created prior to the trade.

The mood swings

The mood swings will still be there even if we trade with rules, and there is no simple way around this, except by exposing ourselves to the market over time. The more we expose ourselves, the more comfortable we become in handling the pressure (the old maxim = practice makes perfect!). The most successful traders will understand this and remain cool and just trade their systemunshakably independently of any short term gains and losses.

One way to get around the pressure is through small trading. Starting out with a low one fifth of your desired lot size can be a good start, eventually increasing the risk as you start to become more and more comfortable.

For more great ideas on how to improve your trading join which hosts an ample amount of On-demand videos and live webinars every day. You could try also your new ideas using a demo account.

Conclusion

Price can trade aggressively higher or lower with an absence of news to back the move. Sometimes price will even trade in contradiction to common sense. This will cause strong mood swings with most traders, hence generate big swings in the markets. Our body can complicate things further by producing hormones such as adrenaline, cortisol and testosterone, which can make us less rational in our trading. It’s important to understand that we might not act in our own interest at this point, which makes it important to plan your trade before your executiveit. Through regular trading, we can become better at handling the stress.

---Written by Alejandro Zambrano, FX Analyst.

To contact Alejandro, tweet him on @AlexFX00

Alejandro hosts our London session outlook every day at 9:30 AM London time. He also hosts educational seminars in London each month and you could join him for an evening seminar or morning seminar, where he will show you how to setup trading ideas before the London session kicks off. Email at azambrano@dailyfx.com for more info.

DailyFX provides forex news and technical analysis on the trends that influence the global currency markets.

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