Trading Strategies for Volatile Markets

FXOpen

Volatile markets can both be challenging and present multiple opportunities for traders. Harnessing the power of specific trading strategies, from the Bollinger Band Squeeze to the nuanced VWAP and RSI combination, can provide critical insights into potential price movements. But these aren’t trade secrets; rather powerful strategies for volatile markets that have stood the test of time. Join us as we uncover four trading and investment strategies that work during market volatility.

If you’d like to start practising immediately, you can head over to FXOpen’s free TickTrader platform. There, you’ll find all of the tools discussed in this article and more.

Bollinger Band Squeeze Trading Strategy

Bollinger Bands are a popular technical analysis tool that measures market volatility using standard deviations. When the bands come close together, it's known as a 'squeeze', indicating temporarily decreased market volatility.

Trading the Bollinger Band squeeze can be effective in identifying potential price moves when overall volatility is high, as a squeeze indicates periods of consolidation before a potential breakout. It’s one of the most common strategies traders use when learning how to trade volatile markets.

Entry/Exit Criteria

These are criteria you may consider when using this strategy.

Entry

  • Observe for the Bollinger Bands to constrict or 'squeeze' closer together.
  • Keep an eye out for a spike in trading volume. A surge often accompanies a breakout.
  • For a potential bullish breakout, traders often enter long when the price closes above the upper band.
  • For a potential bearish breakout, traders might consider entering short when the price closes below the lower band.

Stop Losses

  • For long entries, traders often place the stop loss slightly below the lower Bollinger Band or the recent swing low.
  • For short entries, the stop loss can be placed just above the upper Bollinger Band or the recent swing high.

Take Profits

  • Traders might think about taking profits when the price touches the opposite Bollinger Band. For instance, if entered on a bullish breakout, consider taking profits when the price reaches the lower Bollinger Band.
  • Alternatively, if using other indicators in conjunction, one could assess the momentum and decide on a suitable exit point based on those signals.

Keltner Channel Breakout and Retrace Strategy

Keltner Channels, developed by Chester Keltner, are volatility-based envelopes set above and below an exponential moving average. This indicator is used to understand price movements and volatility. In volatile markets, a breakout from the Keltner Channels can be significant. However, instead of acting on the immediate breakout, this strategy waits for a retrace to the channel's boundary in line with the broader trend direction, aiming to optimise entry points.

Note that here, the Keltner Channel multiplier is set to 1.5.

Entry/Exit Criteria

The strategy is based on the following rules you may follow:

Entry

  • Identify the broader trend direction using basic price action or other trend-determining tools, like moving averages.
  • For a bullish trend, wait for the price to close above the Keltner Channel. After the breakout, watch for a retrace to the upper boundary of the Keltner Channel before considering a long entry.
  • Conversely, for a bearish trend, await the price to close below the channel and anticipate a retrace to the lower boundary of the channel for potential short entries.

Stop Losses

  • For long entries, traders often place the stop loss just below the lower boundary of the Keltner Channel.
  • For short entries, the stop loss can be positioned slightly above the upper boundary of the channel.

Take Profits

  • Traders might consider taking profits when the price either reaches a predefined target or when there are reversal signals against the prevailing trend.
  • If the price crosses the other side (i.e. below when long and vice versa), it may also be a good time to exit the position.

RVI and EMA Crossover Strategy

The combination of the Relative Volatility Index (RVI) with a fast and slow Exponential Moving Average (EMA) offers a strategy that leverages both momentum and trend direction. The RVI measures the direction of volatility, while the EMA crossover identifies potential changes in price direction.

Entry/Exit Criteria

The theory states that traders follow these rules:

Entry

  • Use the RVI to gauge momentum. A value above 50 often indicates positive momentum, while below 50 suggests negative momentum.
  • For bullish conditions, look for the RVI to be above 50 and the fast EMA (e.g., 9-period, blue on the chart) to cross above the slow EMA (e.g., 20-period, red on the chart).
  • On the flip side, for bearish conditions, the RVI should be below 50, accompanied by the fast EMA crossing below the slow EMA.

Stop Losses

  • For bullish entries, consider placing the stop loss slightly below the recent swing low or below the slow EMA.
  • For bearish trades, the stop loss might be positioned just above the recent swing high or above the slow EMA.

Take Profits

  • Assess profit targets by either setting a predefined price level or using additional indicators to identify potential exhaustion points.
  • When the RVI crosses back above or below 50 or a reverse EMA crossover occurs, it may also signal a potential exit.

VWAP and RSI Mean Reversion Strategy

The Volume Weighted Average Price (VWAP) indicates the day’s average price by accounting for both volume and prices. When paired with the Relative Strength Index (RSI), a momentum oscillator that identifies overbought or oversold conditions, they form a potent mean reversion strategy. This combination assists traders in identifying potential reversals when the price deviates significantly from its average value and is in overbought or oversold territory.

Entry/Exit Criteria

You may consider the following steps:

Entry

  • Track the RSI for overbought (typically above 70) or oversold (typically below 30) conditions.
  • For a potential short entry, consider when the price is significantly above the VWAP, and the RSI is in the overbought zone.
  • For a potential long entry, look for instances where the price is considerably below the VWAP, and the RSI is in the oversold zone.

Stop Losses

  • For short entries, traders often set the stop loss slightly above the recent swing high.
  • For long positions, it might be prudent to place the stop loss just below the recent swing low.

Take Profits

  • Consider booking profits when the price approaches the VWAP or when the RSI crosses above or below 50 (depending on the direction of the trade).
  • Price action signals can further assist in determining optimal exit points.

How to Trade Volatile Markets

When trading volatile markets, it's essential to:

  • Stay Informed: Continuously monitor news, as geopolitical events or economic releases can cause sudden shifts.
  • Limit Exposure: Consider smaller position sizes to manage risk effectively.
  • Use Stop-Loss Orders: Implementing stop-losses can help protect your capital, allowing trades to close automatically at predefined levels.
  • Avoid Emotional Trading: Volatility can provoke strong emotions. Maintain a clear strategy and avoid impulsive decisions.

Final Thoughts

In searching for the best option, these strategies for trading volatile markets can be a great addition to any eager trader’s toolkit. But they’re not just for trading; they can be translated into investment strategies for volatile stock markets just by using higher timeframe charts and choosing your favourite stock. Please remember that strategies are not foolproof. They should be modified to suit current market conditions and your trading approach.

If you’re looking to put your newfound skills to the test, you can open an FXOpen account to take advantage of volatility across a wide variety of markets. Good luck!

This article represents the opinion of the Companies operating under the FXOpen brand only. It is not to be construed as an offer, solicitation, or recommendation with respect to products and services provided by the Companies operating under the FXOpen brand, nor is it to be considered financial advice.

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