Foreign Exchange Rates Price Volatility
All forex traders need to have a trading plan and system that they follow. When you create this plan you need to consider the price volatility of the foreign exchange rates. This volatility does affect the way you trade and when you should be trading. It is important that you link this volatility to your trading strategy. When you do this you can see how much volatility your strategy can handle.
What is Foreign Exchange Rates Price Volatility?
It is important that you know what foreign exchange rates price volatility is and what causes it. Forex rates are known to be volatile because of the number of factors that affect them. There are economic and political factors that affect what the rates are. There are also trading factors that can affect what happens to the price.
There are certain currency pairs that are more volatile than others and certain pairs that are only volatile during certain times. Commodity driven currencies are considered to be highly volatile because they are affected by the ever changing demand for commodities. There are other currencies which are not very volatile and tend to have a ranging price movement more often.
The times when currencies are most volatile tend to be when their market session is open. There are also three overlap times when the overall forex market is considered to be more volatile. The most volatile of these overlapping times is the London and New York overlap when the majority of traders are online.
Taking Advantage of Volatility
There are certain trading strategies that take advantage price volatility. These strategies are usually short-term strategies which do not require a lot of leverage. When you use leverage with price volatility you can easily wipe out your entire trading account. To take advantage of price volatility you need to use technical and fundamental market analysis.
With the fundamental analysis you are able to see when prices may become volatile. After the release of a high impact news event the markets generally become volatile. With fundamental analysis you are able to pinpoint when this will happen and the possible movements.
You should then use technical analysis to see when the markets start to change and the exact movements they are undergoing. Technical analysis offers you the entry and exit points for your trade and you need to take note of these.
Using Stops With Price Volatility
When you trade with price volatility it is important that you use stop loss orders. The sudden price movements that come with volatility can easily turn a winning trade into a losing trade. Additionally, times of volatility are often harder to predict than others. This means that you may predict that the movement will go in one direction, but it goes in another direction.
You have to be disciplined when you use your stop loss orders. Once you have determined where they should be set you must not move them. During highly volatile times it is recommended that you risk only 1% of your trading account per trade. Normally you could risk 2%, but the uncertain nature of price volatility means that you could hit a streak of losses before you make profits.