If you want to generate some good returns in the Forex market, you will have to play with volatility. Volatility is highly unpredictable, making it one of the most exciting techniques used in forex trading. Volatility is good, but only when you are on the right side. How do we know whether we are on the right side? And how can we make sure we will stay on the right side? Let us find out.
What does volatility mean?
Volatility is a measure of how much the price of an asset moves up and down. It is measured by the standard deviation of prices, which indicates how price movements vary from the mean price. Volatility is a measure of risk in the currency market. Excessive volatility can make it difficult to determine the value of a currency accurately.
Volatility in the currency market, especially high volatility levels, can create problems for Forex traders. Traders caught off-guard don’t know when to get out of the market. They often trade on the false hope that the market will reverse. Traders don’t want to take massive losses, so they stay in the market.
What causes volatility?
Volatility in the forex markets is caused by constant political, economic, and social uncertainty worldwide. Volatility affects almost every aspect of trading on a global scale. While there are people who trade on volatility, an equal number of traders need to know how to handle volatile movement in the market.
How do you trade volatility?
The key to successful Forex trading is capitalizing on the upswings and downswings that move a currency pair. Trading strategies that are designed to take advantage of volatility can be helpful for Forex traders. However, a trader needs to be careful when trading in a volatile environment.
A trader needs to understand and recognize when the market is volatile. High volatility levels can lead to false signals. False signals can lead to significant losses, and a too-conservative trader can continue to lose money even when the market is trending in their direction.
A trader who recognizes false signals and exits the market accordingly can minimize losses when the market is volatile. Volatility can affect a trader’s performance, and it is one thing traders need to factor in when picking an asset to trade because it continually fluctuates.
For example, should a trader decides to open a trading position on a particular asset, they must decide when to stop trading. There are two approaches: Holding the asset until volatility increases and trading the asset when it’s in a high volatility period, and closing it when volatility decreases.
Trading strategies that are designed to take advantage of volatility can be useful for Forex traders. However, a trader needs to be careful when trading in a volatile environment. A trader needs to understand and recognize when the market is volatile.
Best Volatility Trading Strategies
Here are three Forex trading strategies that work well, especially on low volatility markets:
By day trading, you open your position in the morning, close it in the evening, and let the market run its course. You can take advantage of any fluctuations in price that occur during the day, but you can hedge your risk by limiting your exposure to any one trade.
Scalping is similar to day trading, and instead of holding your position overnight, you open and close your position quickly. You usually open and close your trades within a few seconds of each other. Scalping limits your exposure to small changes in price, but you also miss out on any significant movements.
Swing trading is similar to scalping. The difference is that swing traders hold their positions overnight. The strategy allows them to take advantage of significant price movements without worrying about missing transactions.
Learning how to change your strategy based on market conditions helps you continue making money in the Forex market. It will help you become flexible, adapt when things are not going well, and make more money when they improve.
Since volatility is a measure of risk in the currency market, a trader’s risk tolerance will affect the type of trading strategies they use. In volatile markets, the strategies vary with every trade. There are specific strategies to apply when volatility picks up and those applicable when the market is slow.