Last Updated on: 20th April 2024, 10:10 am
These are the main reasons why you should understand forex volatility
Forex volatility is the force that causes changes in the forex markets leading to great heights and great depth in forex trading. It is also a measure of how currency pairs fluctuate from each other. These heights and depths are the uptrends and downtrends which creates both opportunities and challenges in the trading. So, as an investor, you need to be very careful so that you are able to make some progress in the forex industry.
The first reason to understand forex volatility is to know what causes it and the impact it has on forex trading. The causes of volatility include news that covers economic activities, political atmospheres, and liquidity. Economic factors are very essential since they show the progress of a country. For example, when the level of the unemployment rate goes down, it will strengthen a pair of currencies compared reduced balance of payment. Another economic factor is increasing interest rates to reduce inflation this can attract investors leading to high volatility.
The second aspect of understanding volatility is liquidity. This is how fast people can buy or sell currency in the market. When the ability to do so is high, it increases volatility because the prices change very fast and the movements of the pips become unpredictable with higher losses and profits. One thing you should about liquidity is that it is erratic at specific times and you should note the best days to trade and those to avoid like holidays.
The last factor that causes volatility is the political temperature in a country. For me, I like so much about Australian and Swiss Franc. Knowing political aspects and stand on issues both national and international has helped me to make the right decision in forex trading. Political instability in a nation has a profound effect on forex trading. This is because it causes tensions among nations and hampers smooth relationships. For example, the harsh relationship between Russia and Ukraine has affected forex trading in those nations. Market participants are very sensitive to political news. This is because positive news resulting from political stands has always led to uptrends while negative ones have led to downtrends.
How I have used forex volatility to make progress in forex trading.
I can say that using volatility has really impacted my financial aspect in many ways. For example, I have used to research on news, especially Australia and Switzerland because they have presented me with a lot of opportunities and challenges. On some occasions, I could not make progress because of high risks especially when there are large movements that do not change and go beyond my stop loss.
Despite all the challenges, I have gained by following these steps. First, I have set strict measures where I take profit and stop loss in all my positions. This method has really helped me to secure some profits and limit my losses because I could only lose what I have set and not beyond. Lastly, I have stayed up to date with economic calendars, political news, liquidity, and other factors that influence volatility to maintain my profits streaming in. You can also do the same but you must maintain your strategy to improve.
