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FX Price Volatility and the Use of Leverage

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FX Price Volatility and the Use of Leverage

Leverage is one of the aspects of the forex market that attracts a lot of attention.  There are many retail traders who look at forex simply because of the amounts of leverage on offer.  With certain FX brokers is it possible to get leverage of up to 400:1.  Of course, you have to be careful when you use any amount of leverage.  One of the things that you have to pay attention to when you use leverage is price volatility.

What is FX Price Volatility?

When you are looking at using leverage you have to consider what the price volatility of the FX currency pair is.  Price volatility is the fluctuations that the price goes through in a set amount of time.  This is driven by the volumes of the currency pair that are being traded.  There are certain times when currency pairs are more volatile.  These times generally relate to the market sessions of the country that the currency represents.

It is important that you keep an eye on price volatility not only when you are using leverage.  There are certain FX trading strategies that require volatility to be profitable.  However, there are a number of other strategies that require limited volatility to work.  You have to know what your FX trading strategy needs so you only trade at the right times.

The Amount of Leverage You Use

When you are trading FX you have to consider how much leverage you should be using.  If you have a broker that offers you 400:1 you should consider whether you actually need to use all of the leverage.  Expert trader’s states that leverage of 20:1 should be enough for any trade.  This is why some countries have limited the amount of leverage that their brokers can offer.

The amount of leverage you use should be related to the trade you are looking to complete.  You should also consider how the amount of leverage fits into the risk management plan that you have for you trades.  Most traders will not risk more than 2% of their trading account on a single trade.  This amount should include the leverage that you are going to use.

Leverage and Price Volatility

Once you know about the amount of leverage you should use and the price volatility of the currency pair you have to consider how these two factors relate to each other.  When a currency pair is very volatile it is harder to determine what is going to happen.  This often translates into a smaller amount of leverage being used.

If you use a large amount of leverage with a volatile currency pair you increase the risks of the trade.  As the currency pair could fluctuate at any time you have no way of knowing how much you could lose.  Of course, if you have kept to your risk management plan you should never lose more than 2% of your account on a trade.

There are some traders who increase the amount of leverage they use during volatile markets.  These traders will use extremely short-term trading strategies during these times.  The increased leverage provides a greater potential profit.

 

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