25 Nov Risk and volatility. What to do?
The elections are coming in the USA and like all good news, it produces an increase in VOLATILITY, less LIQUIDITY, which means a greater RISK for your trading ⚠️⚠️ What should you do?
Why do we care about the elections in the USA?
The elections in the USA are important because they generate a lot of volatility within the financial market. They are news that talk about unemployment in the USA, the sale of second-hand housing… but these issues, lately, seem to move the market little, now COVID-19, the elections or even Donald Trump’s tweets are more important .
What moves the financial market?
Anything can move it, but above all it is moved by professionals and they use this news to justify those financial movements that they execute. Also, if you haven’t seen it, watch the video how does the bag work? where I show you through a famous movie from years ago how the financial markets worked that were previously manipulated and the professionals already knew what was going to happen.
The only thing you have to know, and I don’t want you to follow the news, because in the end it conditions you, I recommend my students to analyze the financial market to know what they have to do.
Above all, what I want with the news is that you are not inside because it generates excess volatility.
Is volatility bad?
Personally I like the volatility, the more the market moves I go for a little bit because it will be easier to take that little bit. If the market doesn’t move, it’s going to be much harder to catch a bit.
Financial markets in which there is greater volatility and greater volume will be more favorable. What this indicates in most situations is greater liquidity, that is, what it will mean for our trading operation is that the contracts will be executed better and above all, the purchase and sale prices will be much lower.
What happens in the financial markets during the news?
It is true that the volume and volatility increase a lot, but it is not proportional to when the market is calmer, which means that at each price level, there will not be the same liquidity.
For example, the time dimension of one minute, a candle on the NASDAQ can have 500 contracts, the news arrives, the volume increases and we have 2000 but the range of the candle instead of being 10 points is 100, that is, proportionally there is not the same volume for each price level.
What will it mean?
Worse execution: they will not give us counterparty where we want because there is less volume (less people who want to buy and sell at the same price level as we want) therefore, it will be more difficult for our contract to be executed at the price we want. In addition, the spread will increase, because what the market is trying to do is that your contract can be executed and since there is no one in that spread of one tick, they will increase it until they can correctly execute most of the contracts.
In addition to that great volatility, it can mean a much greater loss.
We are always thinking about the profits, but the profits will come if we control the losses, if we lose control of the losses you will soon be left without an account, therefore, the most important thing is that adjust leverage, to solve this problem.
The Micro NASDAQ which is at $2 may be a way to reduce leverage. For those of you who operate with CFDs, it is easier because you can work with micro-lots.
Risk and volatility. What to do?
When there is news there is an increase in volatility, there is also an increase in volume but there is a decrease in trading at each price level, this means that entering the market is more expensive due to this increase in volatility and also increases the risk of that operation Solution? Decrease leverage or don’t trade.
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