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How FX Trading Is Affected By Volatile Markets


For a fx trader, volatility is like eating wheat bran. It’s good for you – as long as you don’t overdo it. Some currency pairs (like AUD/NZD) appear addicted to volatility; others (such as EUR/CHF) are forced by the central banks involved to hew the straight and narrow course. Regional markets also have volatility traits. For instance, the early morning hours of the Asian trading session feature a far higher average volatility profile than in the late afternoons. Certain times of the month can influence volatility too. If you are a beginner, stay away from the last 2 calendar days of any month or calendar quarter. This is when fx fund managers are “squaring up” and very strange things can happen.

Having a good fx money management strategy is just as important as having a good fx trading strategy. This means that you are always aware of how much volatility is in the marketplace and you have customised your trading to account for it. And, never forget: it’s OK to stand aside.

Volatility As A Measure Of FX Potential

Volatility is to fx what speed is to the Formula 1; you need it in order to get anywhere. On the other hand, everyone agrees that too much can have a deleterious effect. In forex, you want to find a market that has enough volatility to garner a profit, but not so much that your trades go pear-shaped. In order to get to this point, always use an “Average True Range” indicator, on a daily chart, before you start any trade. The higher the number, the worse the volatility. In addition, be careful which currency pairs you trade. Some are more volatility than others. If you’re a newbie to fx trading, stick with the European majors (i. e., EUR/USD, GBP/USD or USD/CHF).

Risk and Reward In FX Positions

Since fx is one of the largest capital markets in the world, featuring all the biggest banks in the world and an event calendar stuffed with potential market-shaking events almost every single day, you need to do everything you can to reduce your amount of risk while trading. This means seeking out relatively non-volatile currency pairs that are trading in defined trends; trading only 1 currency pair; never trading more than 5 contracts at a time; only trading fx Monday – Thursday; and, keeping your leverage ratio at 50:1 or lower. It also means that you’ll never succumb to the foolishness of trading a major market event (like an unemployment rate change announcement), since prices can spike horribly if what’s announced is “unexpected”.

Control Your FX Downsides For Best Chance Of Success

Downside risk can be controlled in 2 major ways. First, research what kind of fx trading you want to do and when. Know your currency pair like the back of your hand. This can be done through the use of a free “demo account”, where you can trade at no risk to your cash kitty. Don’t start trading until you can almost “see” what’s going to happen next in your mind. Secondly, always use stop losses. Stop losses are like safety nets. If the fx trade goes wrong, the worst thing that happens is you hit your stop loss and get knocked out of the trade. If you don’t know how to set a good stop loss, use a “volatility stop” indicator.


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