The USD has entered a new phase of volatility. For 2014 the average volatility range of the USD against a basket of major currencies was approximately 5%. However, today that volatility has increased to almost 13% in Q1 alone and that is double the amount of volatility that we saw in the USD last year. The USD Fed does not seem to give a clear and concise
signal over US interest rates leaving traders of US equities, fx and bonds in increasing agitation. The ECB does not seem to show decisive management over the continuous saga of Greece and her debts. Thus currencies have become more volatile as major pairs struggle to find a clear sense of direction. Higher volatility translates into high daily trading ranges of high and low price which increases the chances of a trade entry being stopped out before reversing again in the original direction once sought out. Many small traders are getting caught out to what is commonly known as whip saw. ie. a trader maybe have entered at 108.00 on the EUR/ USD in anticipation of a bounce on the back of thin trading in USD but then quickly finds his long position retreat again and even over shoot the entry long price to hit the fallback stop-loss, but then to watch in dismay as the price value of EUR/ USD shoots back up again to 109 to confirm all the short term indications of a short term bounce!. Increasing volatility presents chance and opportunity for the astute day trader but could equally become a death sentence for the inexperienced trader trying to grapple with trading the markets with merely a protective stop-loss to cut the losses to the minimum in the case of mistaken entry and reversal.
signal over US interest rates leaving traders of US equities, fx and bonds in increasing agitation. The ECB does not seem to show decisive management over the continuous saga of Greece and her debts. Thus currencies have become more volatile as major pairs struggle to find a clear sense of direction. Higher volatility translates into high daily trading ranges of high and low price which increases the chances of a trade entry being stopped out before reversing again in the original direction once sought out. Many small traders are getting caught out to what is commonly known as whip saw. ie. a trader maybe have entered at 108.00 on the EUR/ USD in anticipation of a bounce on the back of thin trading in USD but then quickly finds his long position retreat again and even over shoot the entry long price to hit the fallback stop-loss, but then to watch in dismay as the price value of EUR/ USD shoots back up again to 109 to confirm all the short term indications of a short term bounce!. Increasing volatility presents chance and opportunity for the astute day trader but could equally become a death sentence for the inexperienced trader trying to grapple with trading the markets with merely a protective stop-loss to cut the losses to the minimum in the case of mistaken entry and reversal.
In times of volatility position trading would become a more sound principle with a view to trade within 50 and 200 day moving averages and support and resistance bands over a greater length of time from a week to several weeks with price targets in mind. Wider volatility would require deeper stop loss positioning yes. But consider the use of a currency option to hedge against the possibility of the trade becoming a total disaster. Thus, currently looking at the current position of the EUR/ USD and the short term bounce achieved from 107 to march back up to 109 this week, a put option could protect the position should a more robust challenge to the psychological 110 level become dampened and fizzles out as speculative shorts re-enter the market and commandeer the market with a push right back down to parity.
The correct combination of long short with stop loss and put call options provides the inexperienced trader with a smaller profit horizon allbeit with a greater chance of minimizing losses and sustaining a trading career.
For further study of options trading to hedge your currency positions please study the following platform -
http://binary-en-option.com/
Academy videos and books -
http://www.anyoption.com/trading-academy
Never enter into any trading plan without careful preparation of risk management assessment.
Pieter Bergli - DeLoren Trust Holdings
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