Four Risk Management Tips When Trading in Highly Volatile Markets

Trading always carries risks, that is the belly of the beast of trying to improve our future via a profit potential. Whether you are an experienced trader or a little green in the gills, there is no such thing as a sure thing in the world of finance. Especially considering most markets have increased in volatility since the coronavirus outbreak.

For that reason, you should always use risk management techniques, tools, and strategies to give yourself a better chance of mitigating trading risks during high volatility periods. While volatile markets bring plenty of opportunities for profits, the opposite is just as likely to happen.

Don’t Overexpose Yourself in a Particular Sector

Just because a certain sector is trading higher on a certain day, it does not mean it always will. Rather than placing all your eggs in one basket, you should consider spreading your risk around. Invest in a handful of sectors that are not correlated with each other. You could also opt to hedge risk a little by investing in a couple of defensive stocks which will offset the volatility of your other investments. Utilities and consumer staples are good options here.

Use Smaller Position Sizes

Seems obvious, but sizing down your positions is a great way to protect against risk. Focusing on just a few positions rather than many is great for staying focused and limiting the chances of making bad emotion-based decisions. Holding too many positions in a volatile market that is known for violent price swings can quickly eat through your capital.

Hedge the Risks of Spot Trades Using Vanilla Options

Trading vanilla options alongside your spot trades is a well-known risk management strategy that allows you to hedge the risks of the latter. Options are a far safer investment because of your premium being the limit of what you can lose. As an option seller, you also stand to lose a lot less with options than if you were trading the underlying instruments.

If you are unsure what are options or how to trade them, we recommend you take the time to learn as despite there being less risk, there is still risk attached.

Implement Wider Stop Losses

Wild price swings in volatile markets is nothing more than the conflicting opinions of those selling and those buying. Such swings can create panic which leads to emotional trading. At times like this, it may seem that even your tried and tested strategies are no longer working and thus you start to question them. Instead, the quicker you realise that panic leads to irrational decisions, the quicker you can make adjustments to how you trade.

One simple thing you can do is to alter your stop loss placement. Widen it so you are not stopped out of trades earlier than you would have liked. Do not just pluck these stop-loss limits out of the air either. Take the time to study the markets to identify strong support and resistance levels.

That’s a Wrap

Whether analysts say Amazon is one of the best investments to make or you should dump Tesla stock, what you choose to do will always carry risk and that is why the above, and other risk management techniques should always be used as part of your trading plans. All successful traders understand risk and make sure to use the best tools, techniques, and strategies to help mitigate that risk.

New opportunities will arise on a daily basis in volatile markets so there is no need to take huge risks. Small gains each day works a lot better than one huge loss chasing what you thought was going to be a huge profit potential. Get your risk management right and the profits will consistently roll in while losses are mitigated.

Leave a Comment

You may also like

Read More