Coping With the Current Forex Markets Volatility

With current markets continuing their turmoil, now is not the best time to be a Forex trader.

So how best to trade the markets? In markets that are volatile systems tend to suffer. This is not a time to rely on your mechanical trading approach to dig you out some profits. Instead you need to draw on your experience and focus on minimising your loses before you think of a profit.

Profits are still there to be had however, but in periods of market volatility, Forex is not the easy money adventure that many are lead to believe

There are several major events that have a tendency to move foreign currency markets which you should be aware of. Perhaps the biggest of these is the Non Farm payrolls release from the US bureau of Labour statistics on the third Friday of each month. This release is keenly watched by traders because the figures tend to have an effect not just on the US dollar but the trends in global markets in general.

These events lead to short term periods of volatility and they can set longer term market trends.

By having a basic awareness of these key events and how they can move markets, we can account for them when making trading decisions.

Similarly when you recognise the markets are increasing in volatility you can account for them in a simliar way that you would when approaching these key market event risk.

Here are three main ways you can approach volatility-

The first approach is to build in a suitable margin of safety to accommodate for the volatility. This could involve widening stops on open trades so that they don’t get ‘stopped out’ by sudden market moves. This is not without its risks however. You have to have a pretty firm conviction in your trading ability to call this right.

Alternatively you could do the opposite and actually ‘tighten’ your stop loss position to reduce your exposure should the market start moving in the opposite direction to your trade. This means that there is more chance of you getting stopped out of the trade but does allow you to minimise your loss.

The second approach is to actually try to ride any volatility. This could involve jumping on short term trends or market moves and getting out of the trade before the market settles. This approach is fairly high risk but can be profitable if you call the directions and your exit correctly. With this type of strategy you don’t want to get caught up in the trade. It is simply a case of diving in and out of the market quickly.

The third approach is simply to reduce or avoid risk altogether. This is not always easy to do but at least sitting on your hands means they won't get burnt. Trading in ‘quieter’ times or when firm trends have established give the greatest opportunity to profit as it is more likely that markets will be less volatile. If you must trade reduce your lot sizes and keep a keener eye on open positions. This will help to reduce your risk exposure and help you ride out volatile periods without going bust.

Having patience can be frustrating at times but it is far less so than losing a trade simply for the sake of jumping in and ignoring risk. This is one of the key attributes that every trader needs to learn to consistently beat the markets.

Euro Rises Despite Worsening Outlook

Last week saw some of the strongest gains in recent weeks for the EURUSD with the pair testing key psychological resistance at 1.300 intraday before closing the week in touching distance at 1.2933.

So does this mark a change in direction for the Euro or have recent gains come simply from a brief surge in risk appetite and the unwinding of the dollar index as it takes a respite from its recent strong gains?

Clearly the fundamental picture for the Euro is yet to pick up. Most recent figures for the current account figures show the deficit increasing to -€5.8 from the previous readings of €5.6 billion Euros. Similarly construction output figures have also disappointed registering -1.0% compared to the previous reading of 0.3%.

While it takes more than just one poor economic report to dictate the longer term direction of a currency it will equally take more than one member state to prop up its fortunes. Germany’s contribution to the Euro zone figures maybe strong but it is unfeasible that one member state can continue to prop up the remaining 15.

However the Euro is not seeing ‘just one poor’ economic report but rather a stream of consistently weak economic figures. These are weighing heavily on the European Central Banks ability to move interest rates and deal with the prospect of Inflation/ Deflation. Couple this with the increasingly negative news flow from the member states and the foundations on which the Euro is built start to look very shaky.

Last week saw the downgrade of Portugal’s Sovereign debt rating by credit ratings agency Moody’s from Aa2 to A1. This has been quickly followed by the downgrade of Ireland’s debt rating by one notch to Aa2. Add these to the already downgraded ratings of Spain and Greece and all is not looking rosy in Euro land.

For anyone thinking that things cannot get worse, attention is next likely to turn to  Italy. The kicking boot of Europe will be the next under the scrutiny of the credit rating agencies and all bets are off as to how far its downgrade will extend. Even ‘peripheral’ European states are starting to creek. Talks ended this weekend with Hungary following a failure to reconcile its budget plan. The country will not have access to the remaining Euro credit line which does not bode well for it economic future.

So against this backdrop last weeks gains look little more than a blip. A small bounce on the back of increasing global risk appetite. Maybe the psychologists are right and a bit of good weather helps us shift our focus to the glass being half full rather than half empty.

However small blips do not make convincing trends. 1.31-32 could well prove the limit of any recent short enthusiasm for the currency. Ultimately jumping aboard the short term recovery is increasingly risky. Sidestepping this bus and buying a pass for the long term trend will probably prove not only more comfortable but a more profitable ride.

Chinese Relax Yuan Peg to Dollar

The Chinese have announced that they are to relax the informal peg the Yuan has to the dollar. Coming before the G20 summit this move has long been called for from the White House. For quite a while now the US has seen the artificial restraint on the Yuan as a way of supporting cheaper Chinese exports.

While the news prompted the Yuan to record its strongest gains in nearly two years there are reasons to believe that longer term, this could see the start of a fundamental re balancing of the Forex markets.

There is little reason to suspect that the Chinese would risk damaging their own economic growth by supporting a rapid appreciation of the Yuan. However such a move does have significant implications for other global currencies. The once mighty dollar is likely to come under intense scrutiny in the coming months and years as the American economic machine becomes increasingly eclipsed in the face of it's rapidly growing internationally neighbors. This will surely pressure its traditional role as a 'safe haven' currency of choice.

The implications are likely to be felt across all markets. The Euro in particular is looking vulnerable. Once touted as the currency to replace the dollar, it is conceivable that it may not even survive the next round of the crisis. Greece is already being propped up and  Italy, Portugal, Spain are likely to be next. One thing is for sure, German opinion will soon force the issue on it's future if Germany is called upon to support too many collapsing European pedestals.

For its part, the Yen is still struggling to get over it’s hangover from the 80’s. The pound, resting on it’s historic laurels also stands to become increasingly marginalized even if it manages to stay afloat in it’s sea of debt.

What we are seeing here are the early signs of what is likely to be a fundamental shift in the way in which global currency markets are balanced. This will see continued flows out of the indebted majors and into the currencies of the  ‘BRIC’ nations which are built on the stability of lower debt and higher economic growth.

This will undoubtedly mean casualties amongst the old guard as currencies of the new economies increase in standing. The world in which the dollar, Euro and Yen played predominant roles is likely to be replaced with a world where the Yuan, Real and Rupee dictate the moves of the currency markets.

Of course an exact timescale for these events to unfold is open to debate, However increasingly, signs are appearing that begin to turn to support this view.

Until the new course is firmly set the waters are likely to remain choppy. This may help to secure further gains in Gold, at least in the short-medium term, as its attraction as a safe haven from volatility increases.

What all this adds up to is exciting times ahead in the Forex markets. Ultimately being on the right side of this fundamental change as it unfolds, is likely to be one of the biggest factors in generating returns from the markets in the next few years.