Stay calm and focused during market volatility

Stay calm during market volatility is essential for every trader. Trading is stressful. Many forex traders spend hundreds or even thousands of hours learning to trade. However, there are so many variables that it is impossible to track them all.

Naturally, when the market gets noisy and things stop going according to plan. It is completely normal to feel fear, frustration, or confusion. The key is to stay calm during market volatility and make decisions based on strategy rather than emotion.

However, any trader who wants to truly thrive needs to learn how to handle these tense situations. There’s a lot of potential in learning how to flourish while other traders flounder.

And that’s what this article is about. We’ll lay out methods of staying cool-headed when the market gets wild, precautions you need to take, and more.

Have a solid plan and stay calm during market volatility

What catches traders off guard, what frustrates and dumbfounds them, isn’t the fact that the markets have started acting irregularly. It’s that they have entered a situation that they weren’t prepared for.

Trades go sideways all the time. Most forex traders have learned to accept occasional losses as part of the market. Traders feel true frustration when they can’t predict these losses, don’t know why they occurred, or how to prevent them.

So, the way to combat this is to plan ahead so as to avoid those unwanted feelings. To do that, we must understand why the markets behave irregularly, and what happens when they do.

When to expect erratic market behaviour and stay calm during market volatility

It oftentimes seems that markets go into a frenzy all by themselves. However, that’s rarely the case. Most often, predictable trader behaviour, news, or reports drive these movements, and you can easily track them.

Predictable market behaviour

Let’s start with the most basic: predictable market behaviour. When Europe’s exchanges open, traders often readjust their positions, which increases activity in European markets like currencies and shares. The same happens in markets around the world.

The big one to keep an eye out for is when New York and London overlap, between 13:00 and 17:00 UTC. This is when global market activity peaks, as the two most active global economies contend with each other.

However, this occurs every day, so day traders quickly get used to it. Research the peak times for your assets and prepare for increased activity during those periods.

Tracking news and economic events

Next, big economic events, such as reports and some news, can be easily tracked through an economic calendar. Next, big economic events, like reports and major news, can be tracked using an economic calendar.

Many calendars are available for free with a simple Google search. Depending on your forex broker and trading plan, you might even have one built into your trading platform.

While this is a simple tool, it’s absolutely crucial if you want to understand when the market will start getting noisy. Checking it before starting your trading session takes a couple of minutes, but it gives you a ton of context and helps you mentally prepare for what you may encounter during the session.

News can be trickier to track because it doesn’t follow a set schedule. You can plan around conferences and speeches, but not an unforeseen event.

However, keeping up with news from global powerhouses like the US, EU, UK, Russia, and China gives you enough information to avoid being completely in the dark.

Browsing major news sources like CNN, BBC, Reuters, Bloomberg, The Economist, and MarketWatch before your trading session gives you a rough idea of what to expect.

Alternatively, if you want a bit less effort, AI tools can help you grasp important events during the day. Although they may prove unreliable at times.

Unfortunately, we are currently living through times of significant uncertainty. There’s a lot going on around the world, and global powers, primarily the US, make sudden, erratic decisions without much warning. Even if you anticipate everything correctly, a sudden market uproar can still catch you off guard.

However, even that isn’t impossible to deal with. However, even that is manageable. When you know how markets move and how to respond, the cause matters less than your actions.

Liquidity and Volatility – the two major shifts: Stay calm during market volatility

The primary thing that happens when markets get chaotic is that liquidity and volatility increase, coupled with a likely widening of spreads. This creates a market that’s simultaneously dangerous but also full of opportunity.

Let’s start with volatility. It simply means more price movement. However, unlike with calm markets, this movement isn’t smooth; it’s often jagged, jumping up and down erratically. However, while these moves are erratic, they are also commonly bigger than they would be in a more regular situation.

Some forex traders choose to avoid these situations, and some take on the risk to make use of the opportunity; more on that in the next section of this article.

Next is liquidity. Generally, you want it to be high, but when volatility is high as well, it can lead to slippage, due to prices changing so rapidly that they shift in the short span between you placing your order and it being processed.

Essentially, this is mostly a downside, but slippage can work in your favour as well. One thing to note is that traders may want to scale down their positions, as they minimise the negative impact of slippage that way.

What can you do to stay calm during market volatility?

Being aware of when markets get noisy and what may happen is one thing, but handling it is a whole new ordeal. Circling back to what we said earlier, you need to plan things out.

Having a pre-planned strategy for these situations can greatly reduce stress and improve your decision-making. Most traders go one of three ways.

Jump In

As noted earlier, if you’re fine with the risk, you may decide that you’ll adapt to the new conditions and try to make use of the opportunity. This, however, requires the most effort to pull off well.

First, you need to reevaluate your entry and exit strategy. Volatile markets call for different setups and confirmations, and often split-second decisions.

The particulars depend on your approach, instrument, and strategy, but don’t expect to be able to trade volatile markets the same way you trade regularly.

In general, volatility calls for a more technical analysis orientation and stricter risk parameters. As noted, increased slippage often accompanies this, so consider scaling back your position sizes.

Regardless of how you choose to navigate volatile markets, you will need to practice trading inside them. Even if you’re a seasoned trader, you may want to open a demo account and test out your strategy, making sure you’re comfortable with how these markets operate before risking your real money.

Stay out

Conversely, staying out of volatile markets is just as viable a trading strategy. Some traders simply don’t handle volatile markets well, and avoiding them instead of struggling inside them is a simple and elegant solution. This is where staying informed and predicting when the market will get rowdy becomes crucial.

The base idea is that not making any trades is much better than making a series of bad ones. And it’s hard to argue with that logic. So, your trading plan here is simple. Close or minimise positions before big announcements hit and re-enter the markets when things calm down.

The slight issue is that even with meticulous preparation, sudden events can leave you in the thick of it before you manage to get out. That’s why, even if you choose this approach, it’s wise to have some knowledge on how to handle volatile markets, not so much to profit in them as to manage to shut down your positions before they get dragged down.

Wait it out

Finally, some traders with long-term orientation prefer to simply wait out these periods, with the central belief that things will return to normal after a while.

And while this approach is as viable as the two prior, it comes with its own challenges. Firstly, it simply doesn’t work with certain tactics like day trading, as volatility may last longer than their desired position length. Secondly, it may incur swap fees that you didn’t intend to pay for a position, but most long-term traders are already prepared for these.

Finally, it requires you to correctly estimate the impact of the underlying source of the volatility. Volatility is caused primarily by trading psychology, as trader reactions are often more severe than the news’ effect. However, sometimes the news does have a real effect, and it can change the trajectory of positions, even after markets calm down.

So, this is the approach that requires the most fundamental knowledge. You need to make a quick decision on the long-term impact of news nearly immediately and choose which positions to stay in and which to abandon, in expectation of them turning. However, if you manage to do so skillfully, you’ll be able to brush off the effect of temporary market fluctuations.

Noisy markets are unavoidable

Noisy markets are an inevitability when trading. They look scary, and are difficult to navigate if you don’t know what you are doing. However, with proper planning, you can become more than capable of dealing with, or even thriving in, such situations.

Be aware that this is not something you learn in a day. No matter which of the three tactics above you choose, you will need to put in some practice, and you’ll face different challenges when doing so. But this effort isn’t wasted.

Learning how to manage these markets will make you a calmer, more resilient trader, able to confidently make decisions where others lose their way.

DISCLAIMER: This information is not considered as investment advice or an investment recommendation, but is instead a marketing communication.