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5 Tips to Help You Trade Successfully in Volatile Financial Market Conditions

“The individual investor should act consistently as an investor and not as a speculator.” – Ben Graham

Financial market volatility tends to increase during periods of economic uncertainty, geopolitical or severe weather events. If the latest series of global events (Hurricane Harvey in Texas, USA, North Korea’s missile testing successes, as well as the continued instability in North Africa and the Middle East) are anything to go by, it makes sense that the markets will be relatively volatile and unstable.

However, volatile market conditions are not all doom and gloom. Short-term up- and down-swings are a standard part of an overall upward (or downward) market trend, and in themselves, they are nothing to worry about. The reason for this is that markets mainly react emotionally to policy changes, news events, and geopolitical turmoil. Therefore, if the news is good, the markets will respond positively and vice versa.

Tips to help you navigate stormy stock market conditions

You can still turn a profit in these uncertain times. It’s important not to let the short-term market volatility affect your trading strategies or activities. Therefore, here are several tips to help you trade successfully during market instability.

Stick to your trading goals and strategies

Emotions have no place in trading. Panicking because of market volatility is counter-productive, and it will cost you money instead of making money. As the Weiss Finance chief market analyst notes: “Investment decisions should solely be based on fundamental and technical analysis that considers the financial condition of the underlying companies.”

Once you have studied asset prices and trends, the next step is to select your entry and exit prices based on realistic profit and loss thresholds. Once you have placed a trade, monitor both the market and your position carefully. Should stock price move outside of your pre-set boundaries, then you need to consider closing your position. Don’t expect to outperform the market. Rather take a conservative position.

Manage risk through diversification

The financial markets will not continue their upward or downward trend forever. The old saying that what goes up must come down applies to stock markets as well. At the same time, it is vital to limit your portfolio’s exposure to risk when the market movements are unstable.

Consequently, it’s advisable to structure your portfolio with an equal balance of long, medium, and short-term investments. Long-term investments grow the slowest, but the trade-off is a low-risk investment. On the other hand, short-term investments are the fastest growing, but they are exposed to the highest risk. Consequently, no more than 33% of your holdings should be allocated to short-term investments.

Reduce your investment amounts

It goes without saying that, apart from restructuring your portfolio if necessary, the long- and medium-term investments should be left alone. Under normal circumstances, they are not affected by the short-term market swings. Therefore, you only need to be concerned about your short-term investments.

One of the ways to mitigate the risk of losing your initial investment is to trade smaller amounts over a shorter timeframe. The more you invest in a single trade, the higher the risk that you will lose your initial investment.

Additionally, day trading is an excellent example of a successful short-term trading strategy. Day traders are responsible for much of the financial market liquidity because they open and close their trading positions within the same trading period. Nothing is left open overnight.

Limit orders

Limit orders are used to specify the maximum amount you are prepared to pay when buying stock. They also allow you to set the minimum price that you are prepared to accept when you are selling your shares in a particular asset. The best time to use the limit orders tool is when the market is very volatile and share prices are swinging often and widely.

Trade cautiously

It is better to wait the market volatility out than to place unconsidered trades. Under normal circumstances, the periods of market instability are relatively short. Therefore, it is better to err on the side of caution than to run the risk of losing large sums of money.

Final thoughts

As the quotation mentioned above by Ben Graham states, the most important element of successful financial market trading, is to be consistent at all times.