What is volatility in Forex Trading?
A currency is often described as 1 with a low volatility or with a high volatility.
But what does volatility actually mean?
Volatility in forex trading is a measure of the frequency and extent of changes in a currency’s value.
So this actually also means the more volatility the more risk.
But it also means more opportunities for the traders because the price movements are bigger..
And the lower the volatility, the less risk of course but also less opportunities.
How to indentify it?
Currency volatility is difficult to identify and track because volatility is unpredictable by nature.
But there are some ways to measure volatility that can help us predict what might happen.
There are two types of volatility that we have to take into account we have the historical volatility and the implied volatility.
Historical volatility has already occurred and implied volatility is a measure of traders’ expectations for the future.
The Historical volatility can be viewed in the charts. Where we can see the obvious spikes through the prices.
For implied volatility, we can can use the four CBOE indices.
That measure the market’s expectations in relation to currency volatility.
Volatility and Risk.
There are some clear differences between volatility and risk.
Volatility cannot always be estimated in advance and is therefore not in your control.
But of course you can always determine your own risk.
After all, you decide how much you bet and when you want to exit the trade.
So that you can never lose more than you want.
Trading volatile currencies always involves risk, as prices can move sharply in any direction at any time.
This big swing can magnify losses as well as gains.
Something that is common in forex trading and what I often see around me is traders deciding to take a chance in a volatile market.
Largely influenced by other traders taking the same action.
In the event of a market crash, traders can sell at a lower price, potentially resulting in large losses.
Therefore, always be aware of the risks and of course the pros and cons of any trade and especially in a volatile market.
And don’t be tempted by other traders because you want to earn money quickly on your trade.
Use your own analysis and your own judgment.
And of course most important of all ensure good risk management!
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