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Using Volatility of the Foreign Currency Exchange

Using Volatility of the Foreign Currency Exchange

The foreign currency exchange offers greater volatility and liquidity than any other financial market.  It is important that you know how you can use this volatility to your advantage.  You should also know when market volatility can cause problems for traders.  When you know this you will be able to profits from the price movements on the forex market.

When is the Foreign Currency Exchange Volatile?

The first point you should look at when considering market volatility is when the market is volatile.  To understand this you need to know about the market sessions and when they overlap.  There are four market sessions which cover the trading times of the entire globe.  During the market times of a currency you will see volatility in that currency.  This means that during the Sydney session the Australian dollar will be volatile.

There are three times in the day when the markets will overlap.  When this overlap occur the market volatility increases because of the number of traders opening positions.  The overlap of the London and New York market sessions is the most volatile of the entire day.  This overlap lasts 4 hours, but the most volatility comes at the beginning of the overlap.  The best currencies to trade at this time are the US dollar, the Euro and the British pound.

Profiting From Volatility

A lot of Forex traders use the volatility of the market to make a profit.  When the market is volatile you will see more trends than ranges.  This allows traders to make a profit from the spike in movement.  Of course, you have to be careful when you trade on the trend because you need to ensure that the trend will continue.  Many traders feel that short-term traders get the most out of volatility but medium-term traders also make a profit from this.

When you choose a trading strategy you need to consider the amount of volatility it requires.  There are certain currencies that are more volatile than others and you should look at trading these.  Of course, of your trading strategy does not require volatility then you should consider less volatile pairs.  The most commonly used strategy that profits from volatility is trend trading.

When you use trend trading you should also use technical tools that should you the strength of a trend.  It is best that you trade on a strong trend because you are able to make the most of volatility.

Losses From Volatility

There are short-term and long-term strategies that cause losses when used on a volatile market.  The short-term strategies are ones where leverage is used and large lots are purchased.  When a sudden change comes to the market these traders can lose large amounts because of the large amounts they have risked.  Most long-term trading strategies should not be used on volatile markets.  Long-term trading strategies call for ranging markets and currency pairs.  There are a number of currency pairs that are not very volatile and will work well for long-term trading.

Of course, one way of limiting the losses you face with volatility is to use a stop loss order.  You should also consider your risk management plan which lowers the overall amounts you can lose.

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