In order to make a profit in foreign exchange trading, you need volatility. Unfortunately, there are many kinds of volatility; only some represent good trading opportunities. For instance, volatility associated with an unpleasant political event or an earthquake is simply too dangerous to trade. On the other hand, volatility associated with seasonal factors (like the end of the Japanese corporate fiscal year in March) can make for some profitable trend surfing. Your foreign exchange trading platform’s charting section should have a couple of volatility indicators that you can use. In addition, you can take a look at a weekly chart, of any currency pair, in “candlestick” formation. If you see a lot of “weekly candles” with long, thin “wicks”, then you are looking at volatile trading conditions. A weekly foreign exchange chart that has a very wide “Bollinger Band ®“ is also symptomatic of high volatility.
Beginning foreign exchange traders should avoid trading relatively volatile currency pairs. In 2013, all of the following currency pairs have shown relatively mellow pricing patterns: USD/CAD, EUR/GBP, EUR/CHF and EUR/JPY.
Volatility Defined In Relation To Foreign Exchange
In finance, volatility is usually defined as a change in price. Rapid price changes are deemed to be “highly volatile”. Slower price changes are termed “less volatile”. As a trader, you want some volatility, in order to make a profit off of pricing discrepancies. On the other hand, if volatility gets out of hand, traders will usually step aside and liquidity will become very poor. At that point, the costs of executing a trade could start to increase rapidly, potentially reaching the point that no one wants to trade. Different forex markets have different volatility profiles. Before you start trading a currency pair, use an “Average True Range” (“ATR”) indicator, on a daily chart, to check out its volatility patterns.
Does Volatility Help Or Hinder Foreign Exchange Traders?
Generally speaking, in forex, volatility is good. It means that there’s a market and where there is a market, there might be a profit! Some currencies are known for being highly volatile, capable of whiplashing a stop loss position to death. If you’re a newbie, you might want to stay clear of all the following more acrobatic forex pairs: AUD/JPY, AUD/NZD, NZD/JPY, NZD/USD and USD/MXN. On the other hand, in 2013, pricing patterns in the USD/CAD, EUR/GBP, EUR/CHF and EUR/JPY have been relatively mellow. However, you need to keep in mind that forex is fairly dynamic and past actions may not insure future results. For example, the US Federal Reserve’s “tapering decision” appears to be a seminal 2013 USD-related inflection point.
Making The Most Out Of Volatility In The Foreign Exchange Markets
“Day traders” need volatility to make a profit. As a result, they tend to gravitate toward “the hottest pair” during any trading period, perhaps leveraging themselves beyond a 100:1 ratio in the process. Since they may be in and out of the market in 5 minutes or less, this kind of trading represents “scalping” at its best. It’s also something that beginners shouldn’t even dream about, as the risks are just way too high for someone with little or no forex experience. Use an “Average True Range” (“ATR”) indicator, on a daily chart, to check out the volatility pattern of any currency pair – before you trade. If your trading platform has a “historical volatility” indicator, you can use that too.
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