What is forex volatility?
Volatility in the forex market is the frequency of how price changes for a currency pair, it is a natural occurrence of the currency which is out of human control. Currency pairs may be described to be having high or low volatility. Traders tend to aim for high volatile currency pairs to trade, as volatility insinuates more price movement, and by having more movement in the forex market, it means more opportunities for traders. Think of volatility as movements on the chart; traders may look at the candlesticks itself and identify which currencies have more chart movement, the larger the movements in the market the better it is for traders.
How to Identify Currency Volatility?
Currency volatility is difficult to identify and track because volatility is, by its very nature, unpredictable.
There are two types of volatility that need to be addressed for an accurate measure – historical volatility and implied volatility. Historical volatility has already happened, and implied volatility is a measure of traders’ expectations for the future (based on the price of futures options).
You can view historical volatility in charts, where you can clearly see spikes and troughs in prices. For implied volatility, traders can use the four CBOE indices that measure the market’s expectations in relation to currency volatility.
Liquidity plays a big role on Volatility
A rule of thumb, the higher the liquidity, the lower the volatility, and vice versa. If a currency is considered to be very liquid, it means the supply and demand for the currency is high, therefore price movement will be subtle and smooth, traders will not have the opportunity of take advantage of large drastic movements in the market.
Trading on a more volatile currency allows traders to enjoy bigger market movements in a shorter period of time in compared to currency pairs that have lower volatility. So, if you are on the right side of the market, you have the potential to be profiting at a faster pace.
Volatility and liquidity around news
All forex traders know and understand a key driver for market movement in currencies are economic data releases, or known bluntly as news. News events have an immediate impact and will cause the underlying currencies to become more volatile. The benefit of news time is that liquidity and volatility both spike, and traders may have a larger opportunity, but keep in mind because of the volatile nature of news data releases slippage are deemed to happen.
If you are a trader who wants to lower risks, possibly start off with pairs that are considered to be of high liquidity, and steer clear of news date releases. Before you make your investment, feel free to reach out professional account managers at MOGA FX. MOGA offers 24-hour personalized client support based on your preferences and needs.
Trading Foreign Exchange Currency Pairs (FX / FOREX) and/or Contracts for Difference (CFDs) on margin carries a high level of risk to your capital. These derivatives may not be suitable for all investors.