Trading Risk Management in Market Volatility Conditions
In response to the recent Covid-19 pandemic, which caused widespread market volatility in all asset classes, the Financial Commission has reminded traders of reasonable ways to protect their account using practical risk management techniques.
In the face of unprecedented global turmoil and major market events, traders should know the following:
Market prices can fluctuate greatly without prior notice or contrary to technical price analysis principles such as support and resistance levels.
Prices may explode during volatility bursts due to the volume of transactions orders in the market as well as participants wishing to trade
price gaps should be expected after planned or temporary market closures during catastrophic or unprecedented events affecting the markets
Margin requirements for holding an FX or CFD position may vary and affect traders' trading accounts as brokers adjust their risk tolerance for clients.
To protect your trading positions, use reasonable risk management methods on your trading account:
Always follow the minimum margin requirements set for each product you trade and calculate at what price you will need to increase your trading funds to hold positions in case the market goes against you.
Learn the liquidation level in your trading account to understand at what prices positions will be automatically liquidated if there is insufficient margin in the trading account.
Reduce your trading positions that take place during temporary or scheduled market closings, such as on weekends, to avoid adverse price gaps.
Always use "stop loss" orders to protect all positions you open in the market.
During the recent market turmoil, there have been numerous price gaps for various financial products, including currencies, oil and stocks. Such gaps often occur without any warning or analytical data about their occurrence. During such market events, the prices specified for the execution of transactions and orders may differ significantly from one tick to another, resulting in an order not being executed or being executed at a price worse or better than expected.
To avoid the risk of price gaps, it is suggested that you reduce the size of your trading position before market closure for example, simultaneous rollovers for CFD products such as oil contracts. During periods of increased market volatility, the opening price after trading resumes can often be far from the previous closing price. By shortening your trading position, you can reduce the risk of losses due to this price divergence. By completely closing positions before market closure on weekends, traders essentially eliminate all risks of adverse price changes when the market opens the next business day.
Using Stop Loss orders
A great way to limit the risk of price decreases when opening a trade is to use conditional orders such as "stop-loss" to reduce the negative risk if the price of the instrument you are trading is going against you. These types of orders are common on all popular trading platforms of FX, CFD and stock brokers. When using stop-loss orders, traders are advised to review their broker's policy regarding the execution of stop-loss orders, as such orders may, in certain volatile market situations, be launched and executed at a price different from the requested order price. In such situations, a trader's order may be executed at a price lower than the requested price. Your broker's trading policy will explain how the broker handles such situations so that you can plan your trading strategy accordingly.
Closing or Liquidation Level
If you are trading in a Forex or CFD trading account with leverage, your account will have indicators such as "close/liquidate" or "liquidation level" the level of margin in your account at which the broker will automatically close all your open trades and orders due to lack of free margin to keep positions open. Brokers can have different liquidation levels 150%, 100% or lower, for example 50%. This means that if the available margin level (i.e. net equity required margin) in your account falls below this critical level, your trades orders will be immediately liquidated. To reduce the risk of liquidation, we recommend that you know your closing liquidation level in your trading account. By calculating how low your available margin balance can be, you will be able to understand how much more risk you can take on your open or pending trades/orders. Knowing the required level of margin in your trading account will help you make better risk management decisions considering the other risk factors mentioned above.