When trading the markets, volatility is advantageous because it allows for wider price ranges, more market activity, and hence more opportunities to profit. However, too much of anything is never good. Volatility forces us to reconsider our risk in terms of the quantity we’ve put on. But to fully grasp the effective ways of handling volatility and keeping our risks tilted to the downside, let’s first discover what volatility means. 

What is volatility?

The rate at which the price of a pair rises or falls is known as volatility in the Forex markets. Volatility is a measurement of how risky a pair is. That is when volatility is high, so are the trading risks, and vice versa. A highly volatile pair is one whose price fluctuates rapidly over a short period. Low volatility refers to a pair whose price moves slowly over a longer period.

How to calculate volatility?

The standard deviation of price changes over a set period is frequently used to calculate it. Standard deviation is a statistical measure of the level of dispersion or variability around a pair’s average price, making it a good way to gauge market volatility. Dispersion is the difference between the pair’s price average and actual value in broad terms. The standard deviation increases as the dispersion or variability increases. The standard deviation decreases as the variation decreases. It is frequently used by analysts to assess expected risk and determine the magnitude of a price movement.

What causes market volatility?

There are several theories about the origins of market volatility, and each of them is likely to contain some truth. It is widely thought that economic releases and news cause volatility. While this is correct, some argue that the underlying cause of the volatility is short-sellers and automated trading robots. One theory claims that market volatility is caused by psychological forces, with volatility occurring when investor sentiment and/or perception shift dramatically. Whatever causes volatility, it certainly exists, and traders must find a way to deal with it successfully.

Can market volatility be used to your advantage?

Yes, you can profit from any type of market. Experienced traders who have dealt with volatility will tell you that there are a variety of strategies that can help generate good profits during volatile periods. One is to start small, and another is to be selective with your trades. Because market volatility can cause whipsaws, it is also important not to be overconfident and to be willing to adapt and change direction quickly if necessary. Remove your emotions from your trading, stay focused, track your trades, and be satisfied with small profits.

Why are some pairs more volatile than others?

Pairs that are considered more volatile are ones that include currencies with a less diversified economy than the more stable, less volatile currencies of larger economies. Low inflation, a stable economy and government, and predictable monetary policies are all signs of a less volatile currency.

The biggest danger for traders who trade volatile currency pairs is that well-thought-out, perfectly crafted technical analysis may not hold true when applied to these more volatile currency pairs. The reason for this is that technical analysis is better used on the market’s most liquid assets. When trading less liquid assets, you’re less reliant on the dominant forces that help predict price movements. Trading the more volatile pairs is more difficult and not well suited to inexperienced traders because of these difficulties and uncertainties. The dominant, more stable, and liquid pairs are a better and safer investment for new traders.

How to trade volatile pairs with Prop firms

It’s critical to stick to a trading plan and not get side-tracked by a trend-defying short-term trigger. In a volatile market, it is far easier to be a successful long-term trader than it is to be a successful short-term trader, so long-term trades should be practiced first.

A trading plan ensures that you make objective decisions at all times, rather than subjective decisions influenced by volatility spikes, which can end up costing you a lot of money and putting your trades and capital at risk.

It is critical to ensure that sound money and risk management policies are in place. Stop-loss and take-profit orders, modifying leverage, and controlling position size are just a few examples. These methods will help you avoid any unexpected events that could result in a loss.

Stop-loss orders should be placed in such a way that they do not trigger too frequently. Stop orders 10 or 20 pips below or above your breakeven price when trading volatile currency pairs are far too close and are more likely to be triggered by volatility than by trend movement. On volatile currency pairs, a general rule of thumb for stop orders is to place it after giving the pair a little room to breathe. Technical indicators that measure volatility over a set period such as ATR could be of great help!

While diversification is beneficial, it is preferable to concentrate one’s trading strategy on a smaller number of currency pairs and trade them consistently. This allows one to gain a thorough understanding of their characteristics and what causes them to rise or fall.

Remember to consider correlation in the Forex market when choosing a pair to focus on, as this can help to reduce overall risk. The link between different currencies or currency pairs is referred to as correlation. For example, it is best to avoid having too many pairs based on the same counter currency, because there is a good chance that an entire portfolio will move in lockstep with the counter currency.

Bottom line

– Currency pairs with high volatility can provide quick profit opportunities.

– However, these gains are accompanied by an increased level of risk.

– In comparison to less volatile pairs, volatile pairs frequently include at least one currency from a geopolitically unstable or underdeveloped country.

– If traders do not have a high-risk appetite, the less volatile major pairs may be more appealing than the more volatile pairs.


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