Forex Currency Volatility

What is Volatility?

 

In order to understand Forex Currency Volatility, let first look at what volatility means. Volatility can be simply defined as variability. Volatility is a standard measure for perils associated financial market instruments. It is a representation of a fortuitous constituent of price fluctuation, the disparity between the maximum and minimum prices. Thus, higher the volatility indicated by a wider fluctuation range implies greater trading risks. Price movements could either be absolute or proportional. Volatility is regarded as a random value, whose mathematical calculation provides a base for risk analysis methods in forex market trading. Volatility can also be measured in statistical standard deviation; it is then used to determine the exposure of financial investments.

For day to day traders, intraday trading (average daily price range) is the most fundamental volatility indicator. There are other longer volatility indicators; they could be annual, monthly or even weekly. However, annual volatility is customary in long term analysis for financial investments.

 

Types of Volatility

 

Traders and brokers are interested in typical pips movement within a certain period. Forex traders deem volatility as the most crucial information indicator to help them decide on closure or opening of currency positions. It can be assessed through various financial indicators such as; Commodity channel index, Bollinger Bands, and Average True Range.

The above indicators are assimilated in prevalent trading platforms. MetaTrader 4 can be used to calculate volatility. Relative Volatility Index is also important. It shows the direction of movement in which the price volatility changes towards. It`s proficiency to show Forex Oscillators signals without replicating them is its main unique characteristic. Moreover, it assists as an authentication tool since it is governed by vigorous market data not encompassed by other indices.

Customarily, Forex traders chose currency pairs for investment based on return/risk analysis. Future and option market traders should be keen on volatility since it is indispensably important for put and call assessment. Also, if spot traders are apprehensive about their returns, then they should consider risk and volatility. When brokers and traders say the market is highly volatile, they mean the currency quotations are drastically changing in a trading session. The higher the volatility, the higher the risk, and the higher the profits. Most people then hastily trade in highly volatile markets and end up suffering serious losses. It is important to take your time and gauge your trading strategies by trading in a calm market where the fluctuation rate is 2.3%.

Scrutinized information about currency pair volatility is available to the public. Normally, it is provided by Forex brokers or their trading platforms. It is important to note that volatility varies according to different market segments. Hence, they may increase considerably faster.

 

What are the most Volatile Currency Pairs in 2017?

 

• USD/MXN
• USD/TRY, EUR/TRY Turkey is a global political player in closeness to Syria. Here there are trepidations on the central bank being disinclined to augment interest rates according to the risk of inflation accelerating.
• USD/ZAR Given the significance of exports of precious metals, the rand is always highly volatile.
• GBP/AUD
• USD/CNH

The above abbreviations;

USD US Dollar ZAR South African Rand
MXN Mexican Peso GBP Sterling Pound
TRY Turkish Lira AUD Australian Dollar
EUR Euro CNH Offshore China Yuan

 

Is Volatility a Favorable Factor for Trading?

 

Volatility could boost your profits but without proper assessment, it can boost your losses too. You can use volatility measure to make trading decisions. For example, your volatility measure can help you try to steady the peril level in each trade. It includes altering your trading size to according to the market volatility. Simply, if the currency pair is highly volatile, then the contract size should be small; and the less volatile the currency pair, the larger the contract size. It is important to adjust your contract size since you will lose more on a highly volatile currency pair.

A major proportion of those with experience trading in the Forex market will prefer trading a less volatile currency pair. This is because with a volatile market, it is hard to hold on to something for long, and at some point, your profits will be lost. Thus, trading in a volatile currency makes it hard on the trader. However, swing traders prefer trading volatile pairs. When formulating a trading strategy, there are 4 things you have to bear in mind; which market you will trade in, when to trade, position sizing and risk management. Knowledge on a market`s volatility will provide information on the above strategy components. Remember that volatility is measured depending on the time period you focus on.