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Guest Commentary: Volatility Returning - Lower Your Leverage

Guest Commentary: Volatility Returning - Lower Your Leverage

Yohay Elam, Forex Crunch,

As the summer nears an end, activity in the markets is expected to rise. Not only are traders returning from vacations, but the busy calendar suggests even more action than usual.

What can traders do to get ready for this change? Here are three things.

The debt crisis in Europe returns, with big hopes but also fears. Details about the ECB's big bond buying program are highly anticipated as well as the ruling of the German constitutional court regarding the legality of the ESM bailout mechanism. All this relates to the situation in Spain. In addition, the troika delegation is returning to Greece to see if Greece made progress. Add high expectations towards the Fed decision and many other events, and you have an explosive mix.

So, here is what you can do:

Stay up to date: The aforementioned events are the biggest ones. There are many more events scheduled and news breaks out unexpectedly. Stay tuned with what's going on - the news could be dramatic to trigger big moves and it's important to know why and if the moves are expected to be sustained.

Consider trading crosses: Often, the risk events cause excessive volatility that makes trading quite choppy. If you want to skip the action caused by some US indicators and focus on longer term moves on other currencies, try trading your specific currency against currencies other than the greenback.

Lower your leverage: The mix of high volatility and high leverage can be lethal to your trading account. Big moves in the right direction are excellent, but even if you got the big move correctly, a sudden swing to the wrong direction may be quite painful, as it may swing away a big chunk of your account. Higher volatility provides more opportunities but more risk. So, lower your leverage and consider smaller positions.

What do you think? How are you getting ready for September?

Further reading: 5 Most Predictable Currency Pairs – Q3 2012

By Yohay Elam, Forex Crunch

Would you like to see more third-party contributors on DailyFX? For questions and comments, please send them to research@dailyfx.com

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