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How To Manage Your Currency Trades In Volatile Markets

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The chart below reflects the volatility for the selected currency pairs in the last two trading sessions.

Here is a 15 minute chart of the AUD/USD:

From swing high to swing low over the past two days the pair has dropped 596 pips.

Here is a 15 minute chart of the EUR/USD:

From swing high to swing low over the past two days the pair has dropped 296 pips.

Here is a 15 minute chart of the EUR/CHF:

From swing high to swing low over the past two days the pair has dropped 483 pips.

So here are some suggestions for how to survive and hopefully thrive in these challenging but also very exciting markets. For illustrative purposes I will use a hypothetical $10,000 account a 50 point stop and 2% risk on each trade. Feel free to adjust and apply any of these numbers to your own individual situation.

2% risk on each trade indicates that I should risk only $200 per position. If I use a 50 point stop that means I should trade 4 mini lots or $40,000 of notional currency per each trade idea. Note however that these risk control rules apply only under normal market conditions. In today's highly volatile market you need to adjust both your stop value and your size in order to properly account of the much greater range of price action.

(Note these are approximations for illustrative purposes only and you should do your own adjustments based on your individual risk tolerance and financial condition)

Looking at the table above we can see that volatility is generally twice as large as the past 90 day average. Therefore to properly adjust to today's turbulent markets we need to cut our position size in half and expand our normal stop by two times it typical value. Going back our hypothetical $10,000 account , the new trade parameters would be - a position size of $20,000 notional value of currency and a stop of 100 points. Using these new risk control measures a trader would still risk only $200 per trade idea but would be able to absorb twice as much adverse movement from the market.

Note that in our discussion of volatility we focus only on risk, not return. That's because as traders, risk is the only factor over which we have any control. For currency traders volatile markets can present an enormous opportunity to take advantage of the price action. However in order to thrive and survive we must be very careful to avoid the impulse of going "all in" on a trade. High leverage and high volatility generally produce a toxic cocktail. Reducing size and expanding stops allows the FX trader to engage this wild and exciting market and still live to trade another day.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.


The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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