This article looks at the impact of volatility on forex strategies.
When you trade on the forex market you need to have forex strategies that you use. It is important that you understand the impact of volatility on the forex strategies that you are looking at. There are some forex strategies where you should avoid volatile markets. However, there are other strategies that thrive on a volatile market.
Trend Forex Strategies and Volatility
Volatility on the forex market can be helpful and harmful when you are working with trend trading strategies. The effect volatility has on your strategies will depend on the timeframe you are going to be trading in. If you are trading on a mega trend which is a long-term type of trade you should avoid highly volatile markets. However, if you are dealing which short trends then volatility is very helpful.
With long-term trend trading volatility can affect the buffer you have for your trades. If you have a number of trends and reversals then you need to have enough money in your trading account to buffer this and avoid a margin call. This is why long-term traders need larger amounts of initial capital when they start trading.
With short-term trends you should consider what effect the market volatility will have. There are times when the market is too volatile for you to trade. At these times you should consider a different forex trading strategy. However, these times are generally not that regular and short-term trades do well in volatile markets. The reason for this is that your trade is not exposed to the market for very long. When you are completing these trades you have to ensure that you have stop loss and take profit orders in place.
Range Trading and Volatility
There are a lot of traders who look at range trading. When you complete this kind of trading you will be doing so over a long period of time. This means that you are bound to hit a volatile period of time. Volatility is actually a part of range trading that you have to accept. While it does not aid your profits you have to weather it to succeed in range trading. To do this you have to have enough capital to buffer the up and down movements of the market volatile markets experience.
Scalping and Volatility
Scalping is an extreme short-term trading strategy and the jury is out on whether or not it works in volatile markets. There are some traders who state that scalping can be done in a volatile market. However, there are other traders who state that volatile markets increase the risks to a point where scalping is no longer a viable strategy. The counter to this argument is that your trade is not open long enough to experience the exposure risk of volatility.
The main concern traders have with scalping in a volatile market is the effect on leverage use. To make the profits that you gain from the small movements with scalping leverage needs to be used. The sudden turns that come with volatile markets can cause devastating losses if you use a lot of leverage.
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