The Forex market is extremely liquid. In fact, it is estimated that the euro-dollar alone moves a daily volume far exceeding the entire Italian public debt (the third largest in the world). This means that the currency market is also very volatile. Prices are subject to significant fluctuations. Of course, not in a constant way: in some periods, volatility increases, both due to endogenous factors (exchanges in the strict sense) and exogenous factors (external events capable of moving prices).
Regardless of the elements that stimulate volatility, the latter represents a factor capable of strongly affecting trading activity, as well as hopes for profit. The trader, in general, if prices start to go crazy, finds himself with blunt weapons: everything he has predicted through diligent technical analysis tends to lose importance and effectiveness. However, this does not mean that the weapons cannot always be sharpened, in order to regain the lost shine.
How to do it? Simple: by adapting money management techniques to changes in volatility. The opportunities are numerous. In this article, we will limit ourselves to suggesting one, namely the one that, more than any other, is within the reach of non-professional traders. The technique in question involves the positioning of the stop loss and take profit.
The stop loss is the level beyond which the position, already at a loss, is automatically closed. The take profit produces the same effect, but it concerns winning positions. The stop loss serves to limit losses, while the take profit serves to avoid dispersing gains. In fact, the price corresponding to the stop loss coincides with the one, reached or exceeded, at which the market sanctions the impossibility of recovery in the short term. Similarly, the price corresponding to the take profit coincides with the one, reached or exceeded, at which the price tends to bounce and decrease after a positive phase.
Therefore, the stop loss must coincide with a support level, while the take profit must coincide with a resistance level.
So far, nothing transcendental. On the contrary, it is all well known. What changes when volatility starts to increase? Simply put, the time horizon with which support and resistance levels are identified. If prices fluctuate a lot, it means that they move within a very wide range, which necessarily characterizes longer periods. For this reason, if volatility increases, the time frame used to track support and resistance levels must be longer.
