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April 19, 2017

Trading in Volatile Markets

One of the most important characteristics of markets for traders is volatility. Volatility brings uncertainty to the table. During times of volatility – such as the aftermath of the Brexit referendum, the US presidential election, or during an important OPEC meeting - markets can react abnormally. This brings into question many existing investment strategies and conventional logic. Market volatility affects novices more than experienced traders because newbies are more likely to get spooked when their underlying assets are fluctuating wildly in price.

Another important point to bear in mind is that market volatility can cause prices to fluctuate up and down. An imbalanced market sends prices to unsubstantiated levels – causing concern that a market correction is on the cards. Novice investors typically try to extricate themselves from the market during times of volatility. This domino effect exacerbates negative price movements in the market. It should be remembered that volatility is an inherent characteristic of the markets over the short-term. The best way to deal with these effects is to take a long-term perspective.

Characteristics of Volatile Markets

Volatility describes the tendency of the markets to rise/fall dramatically within a short period of time. Wild price fluctuations typically ensue during heavy trading cycles. There are many causes of volatility in markets, including economic data releases, analyst recommendations, and financial results. For the most part, investors react to market volatility based on emotional triggers. This is to say that psychological forces drive market activity more than the fundamental factors. The collective mindset changes that the public is feeling at any given time result in market volatility.

Follow Sage Advice at all Times

Experts advise traders to avoid falling into the selloff trap that is so typical of volatile markets. This is to say that stocks, indices, commodities and currencies should be held, or traded cautiously during volatile sessions. Online brokerages make it easy for traders to dabble in the financial markets during volatile sessions, regular trading sessions, and the like. Hamish Barnes Jr., an analyst from Saxon Trade advises his clients to set up an economic calendar at the start of every week.
By plotting out the major economic indicators for the coming week, you get a clear indication of likely drivers of market sentiment. Speculators jump all over the ‘forecast vs actual’ figures and this is precisely what drives markets.’

During volatile trading sessions, the prices of assets will vary wildly. This is true of currencies, stocks, commodities, and indices. While prices are fluctuating, it is likely that it will be difficult to execute trades. High Internet traffic volumes tend to drive up congestion, thereby generating significant price discrepancies. In times of volatile trading sessions, real-time quotes are not necessarily accurate. These prices may be eons away from the actual price, and traders get the short end of the stick. Quoted prices may also be incorrect based on the dramatic changes that are taking place in markets. Throughout it all, it’s important that traders read up on the online brokers they are trading at.

Regulated Brokerages Offer Most Security

Regulation is an essential characteristic of brokerages, in addition to the range of underlying financial instruments, security of investor funds, and the responsiveness of customer support. During volatile trading sessions, it is necessary that traders use limit orders. An interesting example is when geopolitical uncertainty is driving the gold price up or down. In these cases, limit orders can be placed with brokers to buy/sell a set number of gold shares at a specific price point. When prices are fluctuating wildly, it makes sense to lock in additional security with limit orders.  

At times however, limit orders will not guarantee trade executions. Responsible brokers offer professional advice to their clients. This includes a wealth of trading tools and resources such as webinars, technical and fundamental analysis, expert insights, and the like. The mark of a trusted broker is one that acts in the best interests of the client by providing as much information and variety of trading assets as possible.

The views and opinions expressed herein are the author's own, and do not necessarily reflect those of EconMatters.

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