Increased volatility presents a host of opportunities for sophisticated investors, who are always eager to take advantage of market fluctuations in their leveraged trading strategy. However, increased volatility can also result in increased risk, so its important that traders understand how they can protect their portfolio.
This year has shown itself to be particularly volatile when it comes to the financial markets. The Chicago Board Options Exchange (CBOE) Volatility Index – the most commonly used measure of market volatility – has been on average five points higher this year compared to last year. As such, it comes as no surprise that traders are looking to find ways to take advantage of price movements while also protecting their capital, and the good news is there are steps they can take to help mitigate risk.
One of the key ways that investors can mitigate increased risk caused by increased market volatility is through the use of technology. Not only can technology give people the means to make better-informed decisions; it can also prevent mistakes from being made and disadvantageous trades from being carried out.
The growth in popularity of automated trading systems is one indication that traders are putting their trust in technology to guard against the risks of market volatility. These systems allow traders to program a specific set of rules into an algorithm, which can then be executed automatically. The conditions for carrying out a trade or exit can either be kept simple or made more complex, which makes these systems accessible even to those with limited programming experience.
Besides the fact that these automatic systems allow traders to sit back and give their attention to other matters, they also largely take the guesswork out of trading. Instead of spending hours with their eyes glued to ticker tape, hoping to find the right moments to buy and sell, traders can outsource this work to the computer – which is much faster and more accurate anyway.
Obviously, the effectiveness of an automated trading system is based on the parameters you provide – so, if that information is faulty or the rules are programmed incorrectly, then the results will be poor.
For that reason, its important to tap into other tools that can ensure the flow of real-time, accurate information, thus reducing the risk of a losing trade. Creating an even stronger edge, some brokers now offer clients the ability to code, backtest, and deploy their own automated forex trading strategies right from their web browser, enabling them to leverage historical FX rates to simulate a real trading environment.
The last – and possibly most important – way that traders can use technology to protect against market volatility is as a means of education. Given the complex financial landscape of the modern world, its no surprise to see that people are relying ever more heavily on financial experts to provide guidance, but the Internet has also given people the means to make decisions and carry out trades on their own initiative.
At OANDA, were constantly working to develop new tools to ensure our traders have access to the latest information and are educated in how the forex market operates, as this gives them the knowledge and confidence they need to participate fully. There are also a host of sources out there that act essentially as online encyclopedias, offering insights based on years of experience within the industry. By teaching traders about how best to approach the market, as well as the risks and rewards associated with certain type of trades, these resources can actually help them protect their portfolios from market volatility.
While there is no foolproof method for protecting your assets against market volatility, there are a number of ways that you can guard against it. Whether its programming an automated algorithm to carry out trades only under certain circumstances or educating yourself about the types of assets that are most susceptible to market forces, technology plays a crucial role. This is true of institutions large and small, and for traders working on behalf of themselves or others. The financial markets might be hard to predict, but that doesnt mean you should forever be at their mercy.
Mohsin Siddiqui is Managing Director of North America and Head of Corporate Development with OANDA.