Managing Crypto Volatility – Strategies for Safer Trading

When traders approach the crypto markets, they face a reality: the price does not move up or down unidirectionally for much time. The price instead moves across several fluctuations. When these fluctuations exceed an established range and do it so rapidly, traders start seeing the market as 'volatile,' but the questions are:

• What is volatility?
• What does cause it?
• How do traders handle it?

This article explores these subjects, reveals techniques for handling volatility in crypto, and remarks on the Average True Range and Bollinger Bands indicator as tools suitable to determine position size and turning points.

Volatility Definitions, An Approximation To Crypto: What Is It?

Typically, the definition of volatility refers to a market phenomenon where the price experiences substantial ups and downs between determined quotations of an asset. However, it could be a vague definition when the discussion belongs to cryptocurrency markets.

Undoubtedly, the prices go up and down significantly, but there are missing factors in a description like that. Which are those factors?

• Speed of price change.
• Short-term, mid-term, and long-term volatility.
• Dispersion capacity of prices.
• Causes of volatility.
• How does it affect markets?

We can address those elements via two more definitions, which offer insights concerning cryptocurrencies. The first corresponds to the terms in which the standard deviation indicator works. The second contributes from a range condition perspective.

1. From the standard deviation standpoint, which uses standard deviations to react to price changes, we can state that volatility is a statistical dispersion of prices, moving them toward expansion phases in an upward or downward direction.
2. From a range stance, we can talk about volatility as a price breakout across a range expansion, where the price does not cope with a trend and falls from a narrow into a wide market range.

Those two additional definitions can help us dive deep into the causes of market volatility.

Generally, an expansion of the standard deviation precedes a trend formation, informing on the positive and negative returns investors and traders experience and potentially expect. This way addresses the mid-term and long-term concerns.

For example, Richard Dennis in the Turtle Strategy taught learners to wait for a crossover through the upper or lower bands of the Donchian Channel as a signal to enter a potential trend.

A range expansion is more frequent as a short-term event, like intraday trends, and more often as a market reaction to news or manipulations like those promoted by SMC strategies. A range breakout would need momentum, and it is nothing else than the speed at which the price changes.

How does volatility affect the market?

Enough momentum can lead to a directional movement, birthing out a significant trend on a mid-term or even long-term basis. Ultimately, that would depend on the market sentiment and how speculative that is.

As the market moves upward, investors can foresee positive returns at the expense of negative returns of traders on the sell side. Conversely, other traders are waiting to sell at the potential tops of the trend, and depending on the fundamentals that influenced the momentum, the trend might hold out a pullback or fail, causing a downward movement.

Those ups and downs settle the basis for the long-term volatility, its evaluation, and repercussions across the overall market.

Handling Crypto Volatility: Trading Techniques

By understanding the causes and dynamics of volatility, traders can develop techniques to handle it, which is crucial as a mandatory action for proper risk management.

Properly handling volatility allows traders to not only dispense with the worries about its repercussions but to capitalize on it. In crypto, there are various forms of volatility across its different markets.

Although Bitcoin dominates the market, cryptocurrencies may experience singular volatile seasons according to sector type and particular events.

Types of Crypto Volatility

• Memecoins: This sector is highly affected by newbies and experienced traders who drive the prices through speculation.
• Defi: New DeFi tokens circulate as developers deploy new projects. These tokens may face ups and downs at their launching time. Typically, liquidity pools determine their volatility.
• Liquidity Pools: These are a medium to provide low capitalization tokens with liquidity, which impacts the dispersion capacity on prices.
• High-Cap Assets: Bitcoin and Ethereum need extensive capital to move their prices. Typically, news on economics and regulatory factors tend to impact their prices.
• Mid-Cap Assets: Project improvements tend to move prices on cryptos like XRP and SOL.

Handling Volatility And Trading Techniques

By understanding the types of crypto volatility, traders can prepare techniques according to their goals, greed, and style. For example:

• Day traders: these operators can seize range expansion movements, intraday trends, and news events.
• Swing traders: mid-term operators can set up a grid system to manage trades that last days and weeks by establishing automatic buying and selling orders at specific zones.
• Investors: dollar average cost (DCA) strategies are the primary approach for investors to overcome volatile markets.
• Supply, demand, and volume: strong zones can lead to sharp price changes in two ways: a) by bouncing from them and b) by a breakout through them. Increasing volume over these zones can anticipate further volatility.
• Staying informed: news traders constantly monitor information; this lets them prepare in advance for market moves. Other trading styles can emulate such an approach.

Measuring Volatility With Technical Indicators

Other essential elements to handle volatile markets are position size, turning points, and overbought-oversold zones. Let's overview two indicators that allow traders to evaluate those aspects:

• Average True Range (ATR): this calculates the average ranges. The turtles used this tool to adjust the position size according to volatility conditions.
• Bollinger Bands: it can serve traders by measuring volatility expansion. Additionally, Bollinger Bands spot overbought and oversold levels.

Using ATR and Bollinger Bands, traders can develop an advanced technique to calculate position size while handling volatility and spotting potential turning points at overbought and oversold levels.

Conclusion

Volatility is a phenomenon of price dispersion beyond the standard range of an asset, within upward and downward movements, where the speed of price change determines the short-term, mid-term, and long-term repercussions and potential trend formations. Handling volatility requires knowing the type of crypto market, measuring its expansion, and determining position size.

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