Volatility, in forex trading, is defined as the speed and frequency at which a currency’s exchange rate changes in the world of forex.
A currency’s level of volatility (high or low) depends on how far its value deviates from the average value of that currency.
In simple words, volatility is the measure of standard deviation. The more volatility, the more the risk. But, it is also an opportunity for traders to make more profits.
What causes currency volatility?
There are many factors that causes currency volatility. So, you have to know about these factors when considering currency volatility. These include;
- Inflation
- Political factors
- Economic conditions
- Currency’s supply and demand
How can you identify currency volatility?
Volatility is quite unpredictable, making it more difficult to identify on the trading chart. However, there solves every problem. Even though currency volatility may not be very easy to predict, there are still some methods traders can use to make more money.
Types of currency volatility
A trader must learn to identify two types of currency volatility: historical volatility and implied volatility.
Historical volatility is the type that has already happened. But if we look at implied volatility, that is preparing for the future. Implied volatility is the measure of future expectations for the trader.
As a trader, if you want to track historical currency volatility, that can be tracked in the trading charts.
The spikes and troughs in the trading charts are visible. For implied currency volatility, traders can use the four CBOE indices. The CBOE indices measure the market’s expectations regarding currency volatility.
Difference between currency volatility and risk
If we look at the differences between currency volatility and risk, there are quite a few. Volatility is an uncontrollable factor and completely unpredictable, whereas risk is controllable. In risk, you can decide what to do and how to do it. Although these two factors are radically different, they have a strong link.
Trading currency volatility always carries risk because the prices can rise and fall anytime. These large swings are massively risky because they can lead you to a complete loss or a total profit in just a matter of moments.
Final thoughts
Like everything else in the world of trading, currency volatility is also a risk to traders making money. But to reduce the chances of risk and loss, there are always things one can do.
One thing to keep in mind is always to have a trading plan based on a strategy. It is important to plan what you need to do as a trader strategically.
Another thing you can do is keep a trading journal with you. Using a trading journal to record all the work you have done so far is a good habit to adopt. In this way, you stay on top of everything.
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