In the Money Market, because of its high liquidity, price fluctuations and volatility are usually higher than other financial asset markets. What exactly is volatility? What is the volatility of forex? And how does it affect the market if price volatility increases or weakens? This article will review more deeply about price volatility.
What Is Volatility?
Volatility is the amount of distance between the fluctuations / ups and downs of stock or foreign exchange prices. High volatility means that prices go up high quickly and then suddenly fall in quickly too, giving rise to a very large difference between the lowest price and the highest price at a time.
In the Money Market (Forex), the highest price volatility is usually found in the GBP / USD pair, EUR / JPY, GBP / JPY, or sometimes EUR / USD. However, the magnitude of volatility can also change; there are hours when volatility increases, and there are hours where volatility slows down.
Volatility can be shown in a certain number of pips (for example: 200 pips a day), or absolute numbers ($ 0.3000), or the percentage change in foreign exchange prices at the beginning of the period (example: 8.2% a year). The example shown below, is the Movement Table for Daily Currency Pairs Prices in points (pips).
This volatility reflects the amount of risk that exists when we trade in a currency pair. The higher the volatility, the more profits that traders can harvest. On the other hand, lower volatility, for example during Asian market sessions, means that the exchange rate does not fluctuate much and changes tend to be small over time.
Therefore, market volatility has a role in investment returns. In accordance with the saying "High Risk, High Return", then if volatility is high, risk increases, but the number of trading opportunities will also increase.
How to Deal with Volatility in Forex Prices?
After knowing the character of such foreign exchange price volatility, how can we react? Volatility is often seen as negative because it expresses uncertainty and risk. But as a trader, we need to understand that if the results of large profits usually have a high risk too.
High volatility usually makes forex trading more attractive, because the amount of possible profit that can be obtained is a major consideration for day traders; different from the view of stock investors who prioritize "buy and hold".
However, this does not mean we have to trade in periods of high volatility.
Decisions about how to respond to price volatility depend on everyone's investment profile. Every investor has a different investment profile, including: conservative, moderate and aggressive. If you are a conservative trader, then it's better to avoid high volatility. But if you prefer to be aggressive, then targeting profits when the market is crowded is a tempting opportunity. So, check out various forex trading learning materials diligently, understand the psychology and trading style yourself.
Both foreign exchange with high or low volatility (calm) both can be equally beneficial, provided that they use a different strategy. Prices with high volatility are suitable for short-term traders and traders who tend to be aggressive. For trading with high volatility, traders should be trained and stable in trading psychology. Forex traders must be disciplined and have careful planning before making transactions, and understand well how to organize good money management.