Trading FX Volatiliy

Written by Research | 06 March 2010

A Logical Trading Approach

Before the Jobs data came out the reluctance of creating new trading positions has always been a traders cautionary measure not to risk until after any major report. Call it a smart move or simply for other traders as way to trade from a confirmation of the facts.

Trading on a speculative basis will always carry an inherent risk of loss / win ratio with or a lack of a major event. but being able to position a pre-calculated trade when markets stall or on a stand still could be an advantage as slippage from entry can be very minimal. Meanwhile, after a major news occurs, the very tendency to place new orders may simply be entrapped with slippage or more often re-quotes happen. As these were clear examples when the news on the US Jobs was reported.

Building momentum on fresh news may and may not happen as most reports comes are made towards the closing of the trading week. For day traders and scalpers in the market, it is indeed an opportunity as the fast paced prices moves far reaching levels for the least traded pair. The USD/JPY was clearly another example which has made its statement after the fact. The reason was that for the past weeks the limelight was simply on the European currencies that was leading all news and trades leaving behind the the USD/JPY.

As a process of deduction, when Bloomberg came out of the news with 12B in Euro shorts from the previous 8B last week was a fundamental indicator that a bigger portion of the trades were tied down. so choosing the next best thing where the USD/JPY was at its 2nd best price levels from a low of 85.85 last December 2009 was well worth the risk to take along with the much clearer direction for the USD/CHF.

Averaging the trading range for the past weeks with the majors were one of the best techniques along side the moving averages as to were a mid-price entry would be best approached. Of course that is all dependent upon the risk tolerance levels of the investors and the traders strategy applied through the trade plan. The most essential element of a trade plan sometimes would have an average technical of an 8-14 technical tools including a minimum of 5 sequential charts to go along with it. Once that a majority of these indicators are in sync within a three day period of the three trading sessions then and only then that a trading move can be done.

This is one of the necessary elements in the methodology of trading with the foreign exchange market. Although, the risk and reward ratio must at least be a minimum of a three to one ( 3-1) to make it well worth the while; if not then simply walk away. However, for more experienced traders and strategists these method can also work best in saving a trade gone bad / loosing trade due to fundamentally influenced market that may only be on a temporary basis. Cutting a position may ultimately be the next best solution. But by having a barrage of strategic market methods and techniques sometimes winning at the end is more than the amount of funds made but by the gratification and satisfaction of coming out alive in the market is what it is.

Just a word of caution! It would be advisable to seek a mentor /adviser before getting into a volatile market such as the Foreign Exchange. The process can be rewarding of course done right, but there are inherent risk of loosing the initial amount as the market fluctuates much more at times least expected.