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Volatile Currencies And Emerging Markets

December 27, 2018 Posted in Forex Trading News by No Comments

Volatility is defined as a ‘tendency to change quickly and unpredictably.’ In Forex trading, this is a term that is frequently referred to, and it is used when defining the amount of risk or uncertainty involved with the size of changes that occur within a currency’s exchange rate.

High volatility is an indicator that the price of a currency may change dramatically in either direction over a short period. You are looking here at the currency value potentially being widely spread.

Low Volatility is saying the currency has a value that changes gradually over time, not to expect dramatic fluctuations.

For a forex trader, higher volatility means the riskier the currency pair is to trade. In viewing a technical instrument measuring volatility is referring to the standard deviation, over a specific period of time, of the change in the value of a currency pair. This is not an indicator of the direction; it is about the fluctuations of the currency pair. A volatile currency will increase and decrease far more rapidly than a low volatile pair.

While higher volatility indicates high risk, it also indicates the opportunities for higher profits, which is part of its attraction too day traders.

Emerging Markets Catch The Interest Of Forex Traders

A pile of GBP´s

‘G10’ currencies are the top traded currency pairs in this trillion dollar market. Currency pairs such as USD/CHF, USD/JPY, EUR/USD and GBP/USD are inclined to be less volatile than say USD/KRW, USD/ZAR, and USD/BRL from emerging countries. Currencies like the US dollar and the Swiss Franc are seen as ‘safe haven’ currencies. When risk enters the market in whatever form, trade embargo, political upset, Brexit; traders tend to flock to these currencies, and while they can vary in value against other currencies, they do not deviate significantly from one and other, keeping them from experiencing high volatility.

2018 has seen the rise in the foreign exchange market of emerging countries. With it representing 17% of average daily spot volumes. A percentage that is up 7% from 2015. Spring saw the emerging forex trading volumes rise 34.6% in contrast to the previous year. The G10 currencies saw a 3% rise.

Geopolitical concerns, country-specific threats, China-US trade war all have contributed to the dramatic swings in volatility that were seen mid-summer ‘18. Currencies such as the Turkish Lira and even the Chinese Yuan all came under pressure as activities in those countries became intense.

The question is now, what will 2019 bring? Traders need to:

  • Keep a close eye on the volatility and potential of change in the volatility of the currencies being traded.
  • Adjust their position sizes according to the volatility. Increasing volatility indicates traders should lower their position sizes.
  • Learn about volatility, what it is, its effect and how to measure it, as well as being aware of events that could cause it.
  • Learn about volatility, what it is, its effect and how to measure it, as well as being aware of events that could cause it.
  • High volatility currencies are more prone to slippage – where you order can be executed without a stop loss limit in place due to unprecedented events taking place.
  • Determine your position size when trading high volatility currency pairs.

Key Facts To Remember About Volatility & Trading

  1. Use an economic calendar to keep abreast of all significant news events, like Brexit or trade embargos.
  2. Stay up to date with all the latest forex news
  3. Use technical analysis combined with comprehensive risk management principles to gain an advantage in trading volatile currency pairs. Remembering they still follow technical aspects such as trendlines, price patterns, support and resistance levels.