Forex is the perfect market for volatile conditions. There are no circuit breakers, and you can go long and short with ease. The stock and futures markets have daily caps on how much they can move. If you have a position when they get halted, you are at the mercy of where they reopen.
With forex, you also have leverage and a 24-hour market. In volatile conditions, you can trade any hour of the day between Sunday and Friday.
Trading in volatile currencies presents huge opportunities, but it also requires adaptability. Newer traders have likely never seen the price moves that can occur when stocks markets are crashing, or that occurred when Covid hit in early 2020.
In such an environment, my strategies don’t change, but I do a few things differently and I also keep a few thoughts in my mind so that I can trade efficiently, capitalize on the big moves, and keep risk small.
At the time of writing, conditions are relatively calm. But I prefer to teach you something before it happens, so that when a volatile period comes, you will be prepared.
Things to Remember for Swing Trading Volatile Forex Pairs
Below is a list of a few of the things I do and keep in mind while swing trading in crazy times. For forex day trading, not much changes in volatile conditions except that you will see bigger intraday prices moves, which means your stop losses may be a bit bigger and your position sizes a bit smaller.
Higher Time Frame to Find Trades, Small Time Frame for Entries
Under normal conditions, I will often use the daily or 4-hour chart to find trade setups. I will then drop to the hourly or 15-minute to find my entries and stop loss locations (see Forex Price Structure Strategy)
In volatile conditions, I will usually start with the hourly (4-hour or daily is fine too). I look for currency pairs that are near support or resistance or another important technical level. Preferably it is consolidating on the hourly chart near that level. I then drop down to the 5-minute and find a consolidation there, which is closest to the technical level. The two charts below exemplify.
On the chart above, we look that the far right, where it says “hourly chart consolidation”. And the consolidation is occurring in a resistance area. That was an interesting opportunity…so we can drop down to the 5-minute chart to look for an entry.
If the price breaks lower from the consolidation, and a stop loss is placed just above it, the hourly consolidation means risking 50 pips, while the 5-minute chart consolidation risks only 15 pips. The smaller risk means a bigger reward:risk whether the price moves 30, 50, 100, or 200 pips in your favor after entry.
There are a few reasons for doing this.
- Because the market is volatile, the hourly chart is usually showing enough price action to warrant a high-profit trade. Using a daily or 4-hour chart is also fine, but using an hourly will provide more more trades.
- The 5-minute chart keeps our stop loss small. In volatile conditions, I would rather use a small stop loss and lose a few more small trades because I know that eventually, the big move is coming.
- I set the stop loss and entry based on the 5-minute chart, but I can take profits based on the hourly chart. More on that below when we talk about trailing stop losses. This 2-timeframe approach results in huge reward-to-risk trades.
Check out the EURUSD Day Trading Course. It covers strategies for crushing the EURUSD in two hours or less per day—in all market conditions—as well as mental game work and exercises to get you into the profit-making zone.
Use a Trailing Stop in Volitale Forex Pairs
In mid-February of 2020, the EURUSD was moving 50 pips a day. By mid-March of 2020, the average was 150 pips per day. Some other pairs were moving 200 or more pips a day. When volatility starts to increase prices can run way further than I can imagine, and they also reverse just as quickly.
For that reason, I don’t think about profit targets much. Rather I use a trailing stop loss.
I like Renko charts. I will build them to capture the bulk of a move. This means setting up each pair with specific Renko parameters. One setting will not work for all pairs. I exit when the Renko reverses.
ATR stops, or using any type of Average True Range (ATR) multiple can also work well.
When the price reverses more than 1.5x ATR for example, exit the trade. This is based on the longer time frame! If you are taking a trade that looks good on the hourly, use the hourly chart for taking profit. The 5-minute is only used to find an entry with small risk.
A moving average of 10-20 periods can also work. Sometimes the price is on the wrong side of the moving average when you take a trade. The trailing stop loss only kicks in once the price is on the correct side of the moving average. Give it a bit of space. You still have your original stop loss placed at the time of entry on the 5-minute chart.
If you don’t want to hold through any sort of pullback, especially once you have a nice profit, implement an aggressive trailing stop loss.
Exit on “Extreme” Price Moves in Volatile Conditions
If the price moves way more than I ever even dreamed possible, I usually just close it out or implement the aggressive trailing stop loss. If your optimistic view was that maybe the pair would move 100 pips, and it just moved 300 pips in 15 minutes, close it out. Chances are, if you are licking your chops, so is everyone else and the move is close to over.
I am not talking about sustained moves. I am talking about moves that happen in seconds or minutes. Moves that produce a big amount of money to you. If you see a massive spike/drop on the chart, close it out. The market gave you a gift. Don’t let it take it away.
This is why trailings stop losses are nice, because typically they will get you out with most of that profit intact.
The Forex Market Is Not Volatile Every Minute of Every Day
When you make a lot on a few trades one day, it is easy to start thinking trading is easy, and that the next day will be the same. It probably won’t. Just because a pair moved 300 pips today doesn’t mean it will move 300 pips or more tomorrow. It may, but it may only move 100.
We don’t know what tomorrow brings, or even the next trade, so trade the strategy and try to limit your expectations. Just take trades as they come, and follow your entry and exit rules. Pick your trades selectively, always.
Expect Trends and Ranges, Choppy and Clean.
One day the price may move in long trends, the next day the price action is choppy and rangy. As discussed above, we can’t assume that just because the market is volatile it will only move in one direction or one way. Prices will do whatever they want. Our job is not to impose our expectations on them, but rather to trade what is provided using our systems.
Watch what the price action is actually doing, and limit expectations for what you think it should do. My own expectations can cause problems for me, so I work on controlling this every day in my pre-trade routine.
Limit Biased Trading in Volatile Forex Conditions
We should be limiting our biases in all conditions, but volatile conditions present us with a massive profit opportunity. We could completely miss that opportunity, or get stuck on the wrong side of it, if we let our opinions and biases get in the way.
Assume you believe that the EURUSD should fall given what is going on in the world at the time. But instead, it is rallying 150 pips a day. That strong opinion could mean not trading the rally and missing out on profits, or trying to short the rally and losing. Take for example the EURUSD chart above. The market was going up aggressively during this time period. You were either on board or you weren’t. The market doesn’t care about our opinions.
Prediction has no place in trading. We learn a strategy and implement it. That strategy has an edge over many trades, but we have no idea which trades will produce a profit or not. As soon as we start thinking “THIS TRADE” is going to work, we generally run into problems.— Cory Mitchell, CMT (@corymitc) January 19, 2022
We can’t know for sure which way the price is going to go. And it doesn’t matter. I wait for my trade signals, and I take them, regardless of which direction they point. I am willing to trade in either direction, in volatile conditions, because I know the price move is likely big enough to warrant a profitable trade (assuming the price is making larger moves around the time of the trade).
If You Need Trade Ideas
In volatile forex conditions, the trades are typically plentiful.
If you can’t decide which pairs to trade, focus on the ones listed in Which Forex Pairs to Trade. The ones in the first column should provide you with more than enough opportunities.
Next, you can look at which currencies are performing best and worst. The pairs that have very poorly performing currencies combined with very strong currencies will likely be seeing the strongest trending moves (and reversals to follow).
For finding price structures, regression channels can work well.
Final World on Trading Forex in Volatile Conditions
Trust your trade signals.
Review your strategy before trading each day.
Clarify that you will stick to your system, and that the market needs to produce certain criteria in order to get you into a trade.
Limit biases and expectations. Trade what the market provides, and trade with it.
If the market gives you a huge profit, take it, or trail your stop loss aggressively. Things can turn just as quick.
Check out the EURUSD Day Trading Course. It covers strategies for crushing the EURUSD in two hours or less per day—in all market conditions—as well as mental game work and exercises to get you into the profit-making zone. And if you are new to forex, check out the Forex Introduction Course.
By Cory Mitchell, CMT.
Disclaimer: Nothing in this article is personal investment advice, or advice to buy or sell anything. Trading is risky and can result in substantial losses, even more than deposited if using leverage.