{"id":648758,"date":"2025-01-24T14:00:11","date_gmt":"2025-01-24T13:00:11","guid":{"rendered":"https:\/\/ftmo.com\/?p=648758"},"modified":"2025-01-24T14:05:34","modified_gmt":"2025-01-24T13:05:34","slug":"effective-risk-management-using-volatility-and-technical-indicators","status":"publish","type":"post","link":"https:\/\/ftmo.com\/en\/effective-risk-management-using-volatility-and-technical-indicators\/","title":{"rendered":"Effective risk management using volatility and technical indicators"},"content":{"rendered":"
Successful trading in the markets requires not only the ability to analyse the market situation correctly, but also a solid risk management system. The strategy we will describe today combines two key approaches: using historical volatility in pips and technical indicators to determine market direction, allowing traders to effectively manage risk and increase the probability of success.<\/em><\/p>\n The basis of the strategy is to adjust the Stop Loss (SL) based on average daily volatility, minimizing the risk of the SL getting triggered by normal market fluctuations. However, to ensure that trades are opened in the right direction, we use a combination of the RSI indicator<\/a> to identify overbought and oversold zones and moving averages<\/a> (MA).<\/p>\n <\/a><\/p>\n Thanks to these elements, the strategy provides traders with a tool for day trading and medium-term speculation, where the emphasis is on capital protection, precise timing of entries and achieving consistent results.<\/p>\n We open a trade only if the signals of both indicators match:<\/p>\n Example:<\/p>\n <\/a><\/p>\n Long position<\/strong><\/p>\n Short position<\/strong><\/p>\n Stop Loss a Take Profit<\/strong><\/p>\n Position size<\/strong><\/p>\n RSI drops below 30 and then climbs back above 30<\/strong> (signalling an oversold market). In the image below, we see that after reaching a low on the price chart, the RSI dropped below 30 and then came back above it. We then wait for the signal to be confirmed on the price chart using moving averages.<\/p>\n HMA (20) crosses HMA (50) upwards <\/strong>(confirmation of the uptrend). A few candles later, the 20 HMA crosses the longer 50 HMA to the upside, confirming the trend.<\/p>\n The Standard Deviation indicator<\/strong>, shows us that the volatility over the last 60 days is very close to 60 and hence the Stop Loss will be based on that. Thus, in the chart we can see both the entry price and the SL and TP levels.<\/p>\n <\/a><\/p>\n To calculate the position size, you can use our position size calculator<\/a>, which you can find in the Client section of the Tools & Services panel. After entering the parameters (Symbol – EURUSD; Maximum Loss – 1 000 USD; Entry Price – 1.02760; Stop Loss – 1.02040), the position size will come out to be 1.39 lots.<\/p>\n <\/a><\/p>\n After entering the position, the price of the currency pair went up and after a small swing, it finally reached the value set as Take Profit (in our case it was 1.04200) and the trade could end in profit. It should be noted that, as with all other strategies, it needs to be thoroughly backtested<\/a> on historical data before deploying it in real markets. Trade safely!<\/p>\nUsing indicators to determine direction<\/h2>\n
Indicator 1: RSI<\/h3>\n
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Indicator 2: Moving averages<\/h3>\n
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Indicator combination rules<\/h2>\n
Combination of RSI and HMA rules<\/h3>\n
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Timeframe<\/h3>\n
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Avoiding false signals<\/h3>\n
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Complete strategy<\/h2>\n
Conditions for opening a position<\/h3>\n
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Practical example<\/h2>\n
Scenario for opening a long position<\/h3>\n
Entries<\/h3>\n
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Calculation of position size<\/h3>\n