Trading on the forex market is an increasingly popular option among day traders. There are a few reasons for this, the most common being the predictability of the market. It is possible to use changes in one currency to predict changes in another, for example, and even the duration and severity of these changes can sometimes be predicted. This is not to say that forex trading does not experience its fair share of risk.
What types of volatility should you keep in mind, and how do they impact your trading strategy? Let’s take a closer look at the forex market.
What is market volatility?
Volatility means unpredictability. Regarding the financial market, volatility refers to periods of unanticipated price movements. These periods are often unpredictable, even in markets that are typically more predictable than most and can result in sharp price shifts.
Market volatility impacts traders in a few different ways. To understand how volatility might affect your trades, it is important to understand the common types of volatility.
Types of volatility
Forex traders must keep a few kinds of volatility in mind, including historical volatility, implied volatility, and leverage and volatility.
- Historical volatility
Historical volatility refers to the average volatility the market, or a small subsection of it, experiences over time. This is often recorded as annualized standard deviations measuring price movements and can help traders understand the risk inherent to a particular trading pair in the future.
- Implied volatility
Implied volatility is closely related to historical volatility. Implied volatility refers to the annually generalized volatility in forex and how it affects market-determined prices for a specific expiration date. Also known as “market-determined volatility,” implied volatility can help traders assess the likely future risk inherent in a particular currency pair.
Unlike historical volatility, implied volatility can vary widely depending on the strike price and expiration date.
- Leverage and volatility
When used in reference to forex, the term “leverage” describes the size of a controlled trade given a specific amount of money put up either as collateral or as a deposit. This is a handy tool for retail traders thanks to the currency market’s lower volatility. Traders can often predict how a deal will go if they account for the margin or deposit, as described above, even when the market fluctuates a bit.
Reacting to volatility
Reacting to volatility doesn’t have to be a mysterious endeavor. Forex strategy articles, such as those offered by ForexTraders, a well-respected name in the industry, can help you understand how to react and why doing so is the best choice. Whether you are hoping to account for volatility as you conquer the market or are simply interested in learning more about the best strategies to handle it, ForexTraders can help.
Are you interested in diving into the forex market? Keep our tips above in mind, and you’ll find your feet in no time!