In order to maximize your earnings in the forex market, you have to learn how to take advantage of opportunities as soon as they present themselves. One of the most profitable periods for the savvy forex investor is during market volatility. During such a period, a trader can make incremental profits as the market struggles to find its footing. These profits eventually add up and they are sometimes the difference between a successful investor and one who can't make a return on their initial investment.
Therefore, as soon as you settle on a good online forex trading platform, you should start learning about the different ways in which you can effectively take advantage of market volatility. The following are the four strategies that most successful traders use to take advantage of the chaos that a volatile market comes with.
Adopt the color-between-the-lines strategy
This is a trading strategy that is effective in cases where there are general trends. The idea is to ignore the noise that the individual swings in price causes and to focus on the overall trend of the price. To do so, simply draw a straight line that touches the general high points of the price. Draw another straight line that touches the lowest points of the price movement. These two lines should be enough to give you a rough idea of the price trends and a good estimate of where the price will land.
Based on these two lines, you will be able to reliably make profitable trends. Every time the price hits the bottom line, you will know to expect the price to rebound and so you will make a trade that will allow you to profit if the price rebounds. On the other hand, when the price hits the line plotting the price's high points, you will expect the price to fall, and so you will make a favorable trade.
Breaking out of the mold pays
Herd mentality can have an effect on price. This happens in cases where an opportunity is so obvious that a significant portion of traders tries to take advantage of it. A scenario where a loss-occasioning event creates a pile-up of stop orders may also cause sudden spikes.
In cases where traders try to make the same trades at the same time, you can take advantage of the sudden spikes that result from the herd action. These spikes are temporary, and to take advantage of them, you will need to act fast. And for going against the grain, and for being alert and fast, you will be rewarded with profits that gradually add up.
The venturing-a-guess strategy
With this strategy, you plan your trades based on news events that normally have an effect on price fluctuations in the market. To take advantage of this type of opportunity, all you have to do is to guess what is likely to happen and then to structure your trades accordingly.
A good example is the release of various economic data by the United States. In such a case, if the figures released by the United States are good, then the USD/JPY will trend upwards. However, if the figures are bad for the United States, US/JPY will trend downwards. By making an educated guess as to what is likely to happen, you can set your trades in advance so as to take advantage of the eventual price changes.
It is important to note that when it comes to guessing the market's reaction, the degree to which the expectations are off is what will really determine the market's volatility. You can, therefore, take advantage of these swings by carefully analyzing economic indicators and aggregating data from different financial institutions.
When taking advantage of these strategies, it is important to remember that as much as market volatility offers great opportunities for making a profit, it also comes with a lot of risks. Therefore, when executing a trade, it is imperative that you create safety nets for your positions by using stop orders.