Forex Trading: VOLATILITY IN FOREX

There is one thing in particular that wipes out more trader equity than anything else, the volatility! From 1980's up to this time, the distinctive characteristic of the foreign exchange market was its volatility. A currency volatility that was a reflection of major imbalances between national economies.

Volatility refers to the amount of uncertainty or risk about the size of changes in a security's value. A higher volatility means that a security's value can potentially be spread out over a larger range of values. This means that the price of the security can change dramatically over a short time period in either direction. A lower volatility means that a security's value does not fluctuate dramatically, but changes in value at a steady pace over a period of time.

Most forex traders simply can’t deal with volatility. Every trader should learn to deal with it in forex and that means knowing and understanding standard deviation or you will lose all your money! Currencies are volatile, and in theory you can trade for thousands in profits every day.

Volatility is typically measured in two ways

Historical Volatility

Implied Volatility

Historical volatility is a measure of how much an exchange rate has varied over a given time period. Historical volatility is backward looking.

Implied volatility is estimated of a security's price. In general, this volatility increases when the market is bearish and decreases when the market is bullish.

Understanding of standard deviation is important in forex trading, it tells you how volatile prices are. So what is it? Standard deviation is a statistical term that refers to and shows the volatility of price in any currency or financial instrument. It measures how widely values are dispersed from the mean or average.

Here's a speech from the site Federal Reserve Bank of New York about Volatility trend. It may help you give further knowledge about Volatility in the Foreign Exchange Market.

FOREX TRADING TRAINING