Forex volatility refers to currency fluctuations in the global foreign exchange market. Price movements can vary from hour-to-hour, second-to-second depending on a huge number of factors – but is volatility good or bad for traders? Let’s take a closer look.
Volatility in the Short Term
When it comes to making money in the financial markets, there must be price movements, with forex volatility being crucial for short-term investors. Day traders for example, depend on hourly price changes and without fluctuations, there would be no scope for profit. Volatility is also essential for swing traders who work on a slightly longer time frame (usually days or weeks). Swing traders often use technical indicators to analyse the volatility of the market and decide when’s best to exit and enter a trade. These indicators can help predict bullish and bearish trends.
Volatility in the Longer Term
Conservative, long-term traders prefer to follow the ‘buy-and-hold’ strategy meaning they hold currencies for longer periods than short-term traders. As with short-term trading approaches, forex volatility is also essential when it comes to making money from the markets. The general thought behind long-term trading is that price fluctuations will result in a profit over an extended period of time. This strategy requires patience and extensive trading knowledge.
When is Volatility Bad for Traders?
The volatility of FX markets is what many traders thrive on as they enjoy the adrenalin rush that comes with watching price movements and trends. That said, volatile markets come with plenty of risk and therefore it’s really important to manage your trading decisions carefully and to do plenty of research before placing a trade.
Inadequate risk management is the downfall of many traders. Failing to enter or exit a trade at the right time can prove costly, which is why FX traders use a wealth of essential indicators such as Bollinger Bands, RSI, volume, and established support and resistance levels to aid their strategies. Investors looking for returns with minimal risk often choose portfolios with lower volatility rather than opting for portfolios which could either have big wins or huge losses.
To conclude, different traders perceive volatility in different ways and it has a lot to do with an investor’s attitude towards risk. Forex volatility can either raise profit potential or cause unnecessary losses, making it crucial to continuously track market trends and analyse them. This is particularly necessary during times of political and economic instability as both can heavily impact the FX markets.