Different Ways To Manage Forex Trading Volatility

The term volatility is used to refer to price fluctuations over a specified period. In short, high volatility means that prices make large fluctuations. Conversely, low volatility means that prices make small fluctuations.

This behavior is usually measured by technical indicators, such as Bollinger Bands or moving averages. In addition, the volatility index or VIX is also used to predict how volatile price action is expected to be. This is determined by looking at the implied volatility of S&P 500 options for the next 30 days. A high VIX reading reveals that market participants are feeling uncertain while a low VIX figure shows that traders are in a stable market environment.

It is important to look at volatility because it can affect your trade performance. Better yet, it can remind you to make adjustments in your trade style if necessary.

A possible starting point is to measure the average price movement of the currency pairs you normally watch. If you notice an increase in their daily price fluctuations, it could be a sign that you need to adjust your entry and exit strategies. You can monitor whether EUR/USD is still trading around its usual daily range or if it makes bigger moves for the trading day or session.

From there, you can decide on whether you need to make some adjustments in your stop losses and profit targets. You can modify your stops to wider ones to give more leeway to potential spikes in price movement or you can set smaller profit targets so that youre out of the trade before price starts to turn. In addition, you can also consider holding on to trades for shorter periods if you expect quick reversals in the intraday price action.

Volatility in the market is also treated as a gauge of fear and uncertainty. This means that price action is extra sensitive to economic data or market updates. During these moments, its likely that even a small piece of economic data could have a big and lasting effect on price movement.

With that, you should also consider being more watchful of economic releases and market updates during volatile trading days. A prudent move would be to lock in profits or adjust stops prior to an economic release in order to prevent sudden moves from resulting in unexpected and large losses. Always remember that, during these cases, market sentiment can shift on a dime and its best to manage your risk properly in order to protect your account.

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