The currency market is characterised by high volatility. But what does it mean that a market is very volatile? Which currency pairs are most volatile? How can volatility in Forex affect our investment? We will try to answer these questions directly to take advantage of the volatility in our Forex trading.
Market volatility is the variation in the price of an asset relative to its average. It can also be defined as the speed at which the price fluctuates, regardless of whether the value has a particular trend.
Volatility is calculated by relating the profitability of the asset over a period to the profitability obtained in each session and is expressed in per cent or in pips.
Forex volatility is often said to be an indicator of risk, as it informs of the potential for an asset to rise or fall.
To put it in a nutshell, it should be said that, more so than the risk of a security, what is indicated by volatility is the intensity and frequency of the price variation that we are going to have to bear in the investment.
That is, volatility does not increase or decrease the probability of winning or losing on its own.
Learn how to invest in currencies
Investing in highly volatile security means paying constant attention to the evolution of the safety but also provides an excellent opportunity for aggressive profile investors to make a profit.
Volatility is an index of fear, and if we anticipate market reactions, we can take advantage of it.
When security has a clear uptrend, investors move in and out of the market quietly along the uptrend. At the end of the trend, the value begins to turn around and take the opposite direction.
This change may generate a chain reaction among investors due to fear and may lead to a flood of sales from investors who want to divest themselves of value as soon as possible. This generates an unbridled increase in supply that does not meet demand and prices plummet.
We can anticipate this situation and take advantage of it by looking at the volatility of stocks.
A very large increase in volatility can give us a signal to sell what we have or to take positions before the value turns around.
Therefore, volatility in Forex is one of its disadvantages, but at the same time one of the great attractions and reason why the currency market is so used by aggressive traders around the world for the possibility of making significant profits in a very short time.
The strategies based on forex volatility
High volatility markets are characterised by strong upward or downward price leaps, and breakout-based volatility trading systems are designed to take advantage of this type of price action. Volatility-based strategies generally have the following characteristics:
- A large part of the time it is kept out of the market waiting for the required conditions to occur.
- They are not designed to take advantage of significant price movements (trend movements).
- They generate a high percentage of winning trades but have a relatively low average profit per trade.
- These are strategies that can be exciting for the trader as trading is fast and short-term, ideal for low time frames.
- They are systems based on increased market volatility. Therefore, they are not recommended for trendy markets.
When designing and trading volatility strategies, the key is to anticipate and take advantage of significant changes in volatility and close positions without losing a high percentage of initial gains.
Among the most commonly used strategies to take advantage of volatility are
- Trading Hit and Run Techniques
- Coverage Strategy with One-Touch Options for Non-Farm Payroll Trading
- The approach based on Parabolic SAR and volume
Most volatile currency pairs
Volatility in Forex is conditioned by many factors such as market times, the economy, or the trading hours.
The London market has the most volatile Forex session in the world. GBP/JPY or GBP/CHF are very unstable. These pairs or the EUR/USD are followed by intraday traders to achieve higher profits in less time. Other pairs that usually exceed 150 pips per day are the EUR/JPY or GBP/NZD.
Market hours also influence volatility.
The time of day when there is an overlap between the London and US sessions is one of the most volatile times in the forex market and therefore most attractive for short-term Forex speculation.
As we have seen, volatility can mean risk but also the opportunity to obtain higher profits in a shorter period. Depending on the investment profile, Forex volatility can be a useful ally for trading.
The key is to maintain the right mindset when setting oneself to trade with high volatility. Not everyone can ride the train, but it pays to try.