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Currency Volatility: What And How To Trade Them


Currency Volatility: What And How To Trade Them- Currency volatility is characterized by the frequency of rapid changes in exchange rates in the forex market. Understanding forex volatility can help you decide which currencies to trade and how. In this article, we explore what forex volatility is and how to identify it, reveal high volatility currency pairs to look out for, and reveal strategies to use for consistent forex volatility trading.

Volatility in Currency Trading

Volatility in forex trading is a measure of the frequency and rate of change in currency values. A currency can be described as having high volatility or low volatility depending on how far its value deviates from the average – volatility is a measure of the standard deviation. More volatility means more trading risk, but also more opportunities for traders due to bigger price movements.

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Below is a chart comparing Bitcoin/US Dollar and New Zealand Dollar/US Dollar, with orange lines for each indicating Average True Range (ATR), a common measure of volatility. As the ATR values ​​for each asset show, NZD/USD is a stable currency pair, and BTC/USD is much more volatile.

Identifying Currency Volatility

Currency volatility is difficult to identify and track because volatility is inherently unpredictable. But there are several methods of measuring volatility that can help traders predict what might happen.

There are also two types of volatility that need to be addressed for accurate measurement – ​​historical volatility and implied volatility. Historical volatility has occurred, and implied volatility is a measure of a trader’s expectations for the future (based on the price of options futures).

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You can see historical volatility in the chart, where you can clearly see price spikes and troughs. For implied volatility, traders can use the four CBOE indices that measure market expectations in relation to currency volatility.

Trading High Volatility Vs Stable Currencies

With some of the most volatile currency pairs, traders should expect frequent fluctuations. Major currency pairs tend to be more volatile than emerging market currency pairs; currency pairs that are more liquid tend to have less volatility. Some of the most volatile currency pairs include:

  • USD/ZAR (United States Dollar/South African Rand)
  • USD/MXN (United States Dollar/Mexican Peso)
  • USD/TRY (US Dollar/Turkish Lira).

AUD/JPY Volatility

AUD/JPY is another pair that has historically been considered volatile. The chart below shows the price movement of the asset, again alongside the ATR. The circled section is just one example where the ATR reached a new upside level as the AUD/JPY exchange rate fell rapidly.

Examples of currencies that are traditionally viewed as having low volatility include:

  • EUR/GBP (Euro/Pound Sterling)
  • NZD/USD (New Zealand Dollar/US Dollar)
  • USD/CHF (United States Dollar/Swiss Franc)
  • EUR/USD (Euro/United States Dollar).

You may use different indicators when trading high and low volatility currencies. For lower volatility currencies, you can use support and resistance levels. It shows where the forex market has moved up and back down, so it can be traded by helping you predict market movements. You can set your stop loss at the level you think is right to make sure your losses don’t increase.

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This may be more difficult to do with volatile currencies because changes in price can be erratic. These are some of the indicators you can use to trade:

Bollinger Bands: This indicator can be used to show whether the market is in an overbought or oversold state, increasing the likelihood that the price will start moving in the opposite direction.

Average True Range: This indicator can be used as a measure of volatility, and can be applied to the method of closing trades using trailing stops to limit losses

Relative Strength Index: You can use this to measure the magnitude of a price change, again showing whether a currency has been overbought or oversold so you can decide on your position.

Understanding the Difference Between Volatility and Risk

There are some striking differences between volatility and risk. Volatility is beyond your control, risk is not. in terms of risk, you can decide exactly how much you are willing and able to manage this risk. However, the relationship between the two is strong. Trading volatile currencies always carries risk because prices can move sharply in any direction, at any time. This big swing can magnify losses as well as gains.

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One of the common patterns that emerges in forex trading involves a group mentality level – a trader decides to take his chances in a volatile market, which is mostly influenced by the fact that other traders are taking the same action. In the event of a market crash, traders may enter short positions at lower prices, potentially incurring large losses. You should always be fully aware of the risks and weigh the pros and cons of any trade, especially when the market is volatile. Never take risks based on public opinion but use your own judgment, use your personal risk management strategy to ensure you are trading with the level of risk you can afford.

Forex Volatility Trading Tips

There are certain forex volatility trading strategies and tips that you can use. These will help you maximize your trades, but most importantly, they will also help you minimize risk so you can protect yourself from heavy losses. Volatile markets are always risky, so one of the most important things you can do is to have a strategy and stick to it.

Forex volatility trading tips:

  • Trade using charts and indicators
  • Trading around news and events
  • Use stop loss
  • Keep position size low
  • Adhere to your forex trading strategy
  • Create a trade journal

Trading Using Charts And Indicators

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As discussed above, there are various technical indicators that you can use to anticipate market sentiment and make predictions about the future direction of prices. While it’s uncertain, using charts and indicators will help you formulate a strategy and choose when to enter a position.

Trading Around News And Events

Keeping up with current news and events can alert you to events that may have an economic impact and affect currency values. Currency volatility often coincides with political or economic turbulence, so general awareness of news releases can be observed on the JavaFx economic calendar. Trading in news events is one way of avoiding volatile conditions.

Use Stop Loss

Using Stop Loss is always a good practice to minimize risk when trading and this becomes even more important when you are trading volatile currencies. Your stop loss will ensure that any trade losses can be calculated in advance and you can choose the level of loss that is affordable for you in the worst case scenario. This is especially important if you are trading with leverage, as your losses can be significant, and you could end up losing more than you deposited.

Keep Position Size Low

There is the potential for big wins in the turmoil of the forex market, but there is also the potential for big losses. Keeping your position size low is a wise decision for any trader who takes advantage of volatility. It is advisable to make sure you risk no more than 5% of your account on each open position. This will give you more wiggle room without draining your funds quickly.

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Adhere to Your Trading Strategy

Make sure you have a trading plan, and stick to it. Following your trading plan closely will help you manage volatile market swings.

Using the tips outlined in this section and following your trading plan closely will help you navigate volatile markets and trade more consistently.

Create a Trading Journal

Using a trading journal to keep a record of your trades is a very good habit to adopt. This is especially valuable when you are trading in volatile markets, allowing you to review your trades so you can consider what worked and what you could have done differently. A well-organized trading journal will help you become a better trader through a continuous process of self-evaluation, reflection and improvement.

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