Dealing With Forex Market Volatility
When market participants talk about volatility, they are referring to the change in average price fluctuations for a particular time period. Simply put, volatile trading days means that there are larger price movements for the day or week compared to times when the market is said to be less volatile.
Volatility is determined by taking a look at chart indicators, namely moving averages or Bollinger Bands. On top of that, the VIX or volatility index can be used to estimate future volatility. The VIX is calculated by using the S&P 500 options implied volatility for 30 days. This shows how market participants are expecting price volatility to fare in the coming trading days. A high VIX shows that theres a lot of uncertainty and that more volatility is likely while a low VIX means that market price action is expected to be more stable.
It is important to look at volatility because it can affect your trade performance. Better yet, it can remind you to make adjustments in your trade style if necessary.
A possible starting point is to measure the average price movement of the currency pairs you normally watch. If you notice an increase in their daily price fluctuations, it could be a sign that you need to adjust your entry and exit strategies. You can monitor whether EUR/USD is still trading around its usual daily range or if it makes bigger moves for the trading day or session.
From there, you can decide on whether you need to make some adjustments in your stop losses and profit targets. You can modify your stops to wider ones to give more leeway to potential spikes in price movement or you can set smaller profit targets so that youre out of the trade before price starts to turn. In addition, you can also consider holding on to trades for shorter periods if you expect quick reversals in the intraday price action.
Volatility in the market is also treated as a gauge of fear and uncertainty. This means that price action is extra sensitive to economic data or market updates. During these moments, its likely that even a small piece of economic data could have a big and lasting effect on price movement.
In this case, you should be more watchful of upcoming reports and market events. To protect your account or profits, you can exit trades prior to the event or you can simply move your stop to entry for a breakeven trade. Bear in mind that, even with unpredictable market behavior, you can stay on top of your game by making good decisions in terms of risk management.
Volatility is determined by taking a look at chart indicators, namely moving averages or Bollinger Bands. On top of that, the VIX or volatility index can be used to estimate future volatility. The VIX is calculated by using the S&P 500 options implied volatility for 30 days. This shows how market participants are expecting price volatility to fare in the coming trading days. A high VIX shows that theres a lot of uncertainty and that more volatility is likely while a low VIX means that market price action is expected to be more stable.
It is important to look at volatility because it can affect your trade performance. Better yet, it can remind you to make adjustments in your trade style if necessary.
A possible starting point is to measure the average price movement of the currency pairs you normally watch. If you notice an increase in their daily price fluctuations, it could be a sign that you need to adjust your entry and exit strategies. You can monitor whether EUR/USD is still trading around its usual daily range or if it makes bigger moves for the trading day or session.
From there, you can decide on whether you need to make some adjustments in your stop losses and profit targets. You can modify your stops to wider ones to give more leeway to potential spikes in price movement or you can set smaller profit targets so that youre out of the trade before price starts to turn. In addition, you can also consider holding on to trades for shorter periods if you expect quick reversals in the intraday price action.
Volatility in the market is also treated as a gauge of fear and uncertainty. This means that price action is extra sensitive to economic data or market updates. During these moments, its likely that even a small piece of economic data could have a big and lasting effect on price movement.
In this case, you should be more watchful of upcoming reports and market events. To protect your account or profits, you can exit trades prior to the event or you can simply move your stop to entry for a breakeven trade. Bear in mind that, even with unpredictable market behavior, you can stay on top of your game by making good decisions in terms of risk management.
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