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How To Trade High Volatility Markets 

Last Updated: August 2, 2022

By Rayner Teo


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In today’s episode, you’ll discover how to trade high volatility markets (without getting killed).

So listen to it right now…


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The Moving Average Trading Strategy Guide


Hey, hey, what’s up my friend?

In today’s episode, I want to talk about how you can trade high volatility markets.

Because now with the Covid virus around the world, a lot of markets’ volatility has spiked up tremendously.

So how do you handle such volatility in the markets? How does trading high volatility markets work, especially for those of you who are new to trading? This is a market scenario that you’re very unfamiliar with.

1. Have a wider stop loss has to be wider and don’t use a fixed stop loss

Let’s say the EUR/USD, about one year ago, the daily range of EUR/USD is about 50 pips. Now if you look at the charts EUR/USD swings anywhere from 120, 130, 140 pips a day. So if you use a fixed stop loss, that you’ve been using all along, you’ll get stopped out of your trades very often.

Likewise for the S&P 500, about one year ago, it makes an average about 50 points a day. Now the S&P 500, from what I last checked, can move 150, 160 points in a day. It limits up and down on quite a number of days in a row.

You can see that volatility now has increased tremendously and if you’re still using that same tiny stop loss that you’ve been using all along, you’re asking for trouble, you will find yourself getting stopped up over and over again and wondering what the heck is going on.

That’s because the volatility of the market has changed and so in high volatility trading environment, your stop loss should be dynamic in the sense that accounts for the current volatility of the markets as well.

2. Your position size should be reduced accordingly

For example, if you used to have 100 pips stop loss and you traded with let’s say 1 lot. Now if your stop loss has been increased to let’s say 400 pips, then you can’t be still trading that 1 lot because your losses now are going to be larger if you stick to that same lot size.

What you need to do in high volatility trading environment is to reduce it accordingly. If you’re trading with a 400 pips stop loss, your lot size should be about 2.5 mini lots to compensate for the increase in volatility.

So reduce your position size accordingly when your stop loss gets wider. This way, when you take a loss it’s still pretty much of similar percentage to what you’ve been doing previously.

3. Don’t chase the market

I know when trading high volatility markets, it might seem very easy to make profits because the market is just moving in one direction, “Oh look at how bearish the candle is, I can just get a small bite out of the market.”

The problem with chasing the market is that when the market reverses, the reversal is equally swift to the opposite side as well. And when you’re chasing the market, there’s no logical place for you to set your stop loss.

If you don’t believe me, just look at those charts that have gone parabolic like oil, AUD/CHF whatsoever. You’ll notice that the nearest market structure is pretty darn far away.

This means when the pullback comes it can be very swift against while it looks for the next market structure. Like for example looking for the next resistance that could become support which is pretty damn far away.

If you’re chasing the markets, there’s no logical place for you to set your stop loss and when you get the pullback, you’ll likely get stopped out of your trade.

So how to trade volatility in this case? Don’t chase the markets.

4. Trade only from key price levels

This could be key support resistance, multi-year highs, multi-year lows. Those are where the market is likely to find a reaction from and you can establish trades at those key market levels.

Alternatively, what you can do is you can also wait for the market to consolidate to form a buildup before making the next wave of the move.

Let’s say, the market broke out from all-time highs, you don’t want to be chasing the market. You should instead let the market consolidate, let the 20MA catch up with the price.

By the time the 20MA has caught up with the price, the price would have consolidated for a while, I’m guessing maybe 10, 15 candles forming something like a bull flag pattern.

Now, when the bull flag pattern is formed, then you can look to buy the next wave of the breakout maybe just using a buy stop order above the previous high then your stop loss can just go 1ATR below the low of the bull flag.

In this way of trading high volatility, you have a level there where you can enter and define your risk if you were wrong (which is just the lows of the bull flag).

By trading from key levels, by letting the market consolidate first, you could better manage your risk in such high volatility trading environment.

5. You can stay out of the markets

In such a market condition, if you’re uncomfortable and have no clue as to how to trade volatility, you can just stay out of the markets and have no position. You can just hold on to cash because having no position is a position itself.

You don’t have to force the trade in market conditions that you’re not comfortable with. You don’t have to force the trade when you don’t know what you’re doing. You don’t have to force a trade in a high volatility trading environment.

Stay on cash, let the dust settle and when things become clearer to you, then you can look to trade the markets again. The market will still be around the next 5 or 10 years.

Don’t lose it all during this high volatility trading environment because you think you need to do something about such market conditions because that’s bullshit. No position is a position itself.

Ignore what’s going on out there, the media, the social media, and how much money people are making. Those are irrelevant to you. Those are noise to you. If you don’t know what’s going on now, stay on to cash because cash is also a position itself.

If you want to discover more on how to use volatility in trading and volatility trading strategies, then check out The Average True Range Indicator Strategy Guide.

Stay safe my friend, and I’ll talk to you soon.

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