How to Trade in a Volatile Market During Trade Wars in 2025

The global financial landscape of 2025 is being reshaped by escalating trade conflicts, creating unprecedented turbulence in markets worldwide. For traders in India, the stakes couldn't be higher as the rupee faces extreme pressure amid cross-border tariff battles. With India's export-driven sectors caught in the crossfire and the country's growing financial markets experiencing ripple effects, traders are grappling with volatility levels not seen since the 2008 financial crisis. As major economies exchange increasingly punitive trade measures, Indian businesses and investors find themselves vulnerable to decisions made in Washington, Beijing, and Brussels. The question isn't whether volatility will persist; it's how severe it will become and whether you're prepared to navigate these treacherous waters. 

What is the trade tariff war?

The 2025 global trade environment has deteriorated dramatically, dominated by aggressive tariff policies implemented by the Trump administration. Following initial announcements of a 10% across-the-board tariff on imports, tensions have escalated dramatically, with China now facing duties of up to 145% on goods entering the United States. The situation with other trading partners isn't much better, with Canada and Mexico subject to 25% tariffs, including significant duties on energy products. 

What began as targeted economic measures has evolved into a full-blown trade war. After the U.S. announced a 90-day pause on "reciprocal" tariffs for most nations (excluding China), markets briefly rallied, only to plunge again when China responded with its own 125% tariff on American imports. This tit-for-tat escalation has created what economists describe as a new normal of heightened market uncertainty. 

The ripple effects have been substantial. The MSCI World index and S&P 500 dropped 3% and 2% respectively in a single week, while Asian markets fell 5% and European indices plummeted 6%. For Indian traders, understanding these broader market movements provides crucial context for navigating the volatility in domestic markets. 

How Do Trade Wars Affect The Economy?

The effects of these tariff wars on forex markets have been profound and multifaceted: 

• Extreme USD volatility: The U.S. dollar has experienced erratic movements as markets attempt to balance the protectionist policies against concerns over economic slowdown. 
• Euro strengthening: The euro has emerged as a relative safe haven, with the European Central Bank's stance and lower exposure to trade tensions boosting confidence in the currency. 
• Record FX options trading: Hedge funds and asset managers have dramatically increased their options purchases, with volumes surging to record levels as protection against sudden currency movements. 
• Historical volatility levels: Currency pairs are experiencing some of the sharpest price swings since the 2008 financial crisis, with volatility expectations for the next month reaching two-year highs. 
• Emerging market vulnerability: Currencies from export-dependent economies, including the Indian rupee, have seen heightened volatility as global trade flows become increasingly unpredictable. 
• Decreased correlation with fundamentals: Traditional relationships between economic data and currency movements have weakened as policy announcements and tariff threats overwhelm other market factors. 

Strategic Trading Approaches During Tariff Volatility 

Successful trading in this environment requires a fundamental shift in approach. With markets experiencing what one trader described as "insane" volatility levels, position sizing has become crucial. Traders are reducing their typical exposure by 30-50% to account for wider swings and unexpected announcements. 

Digital options have gained popularity as they offer fixed payouts in uncertain conditions. As noted by market participants, these instruments provide traders a way to speculate on market outcomes with defined risk parameters, which is particularly valuable when tariff announcements can trigger sharp market movements in either direction. 

The decreased cost of establishing options positions presents an opportunity for traders. As volatility indicators pulled back from January highs, the relative affordability of hedging strategies has improved, creating what Peter Vassallo at BNP Paribas Asset Management describes as attractive entry points for both protective and speculative positions.

Special Considerations for Indian Traders 

For Indian market participants, the current environment presents unique challenges. India's significant trading relationships with both the U.S. and China place the rupee in a precarious position, vulnerable to crosscurrents from multiple directions. However, India's domestic economy provides some insulation compared to more export-dependent nations. 

Indian traders should pay particular attention to sector-specific tariff announcements, especially regarding pharmaceuticals, textiles, and IT services, areas where India has substantial international presence. Understanding how these targeted measures might affect supply chains and capital flows provides an edge in anticipating market reactions. 

The Reserve Bank of India's intervention patterns also merit close monitoring. Historically active in managing excessive rupee volatility, the RBI's actions provide important signals about potential support and resistance levels that can inform trading decisions during periods of extreme market stress.  

Essential Tools for Monitoring Trade War Volatility 

Trading in tariff wars requires enhanced monitoring capabilities. Traditional economic calendars must be supplemented with real-time news alerts focused specifically on trade policy announcements, which have become the primary market movers in 2025. 

Volatility indicators like the VIX for equities and the MOVE index for bonds have become essential barometers for forex traders. These metrics provide valuable context for understanding the broader market's perception of risk and uncertainty, with both indices showing dramatic spikes following recent tariff announcements. 

Options market activity has become increasingly informative as large institutional positions can signal how professional investors are preparing for potential market scenarios. The surge in FX options volume reveals where "smart money" anticipates significant moves, offering retail traders valuable insights if properly interpreted. 

Expert Outlook for Remainder of 2025 

Financial experts remain divided on how markets will evolve through the rest of 2025. JPMorgan's electronic trading survey indicates continued volatility, with inflation and tariffs remaining the primary market drivers, followed by geopolitical tensions. The unpredictability of policy has made traditional economic forecasting increasingly challenging. 

Many analysts predict that once the initial shock of new tariff regimes stabilizes, markets may find a new equilibrium. However, others warn that the escalatory nature of trade disputes suggests continued uncertainty throughout the year. With the Federal Reserve's decisions complicated by tariff-induced inflationary pressures, interest rate trajectories have become less predictable, adding another layer of complexity for traders. 

Practical Strategies for Volatility in Tariff Wars 

For traders navigating the challenging waters of 2025's tariff-driven markets, adaptability is key to survival and success. Maintaining adequate cash reserves to capitalize on extreme moves, employing strict risk management protocols, and staying informed about both economic fundamentals and policy developments are essential practices. 

While the unpredictability of trading in tariff wars may seem daunting, history shows that periods of extreme volatility often create the greatest opportunities for prepared traders. By understanding the underlying dynamics driving market movements and maintaining emotional discipline, Indian traders can potentially turn this period of uncertainty into profitable trading opportunities. 

Remember that in environments where price swings become more pronounced, traditional technical patterns may break down. Focus instead on range-based strategies that can profit from volatility itself rather than trying to predict exact market directions in a news cycle dominated by unpredictable policy decisions.