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What is Forex volatility?
What is Forex volatility?

When starting to invest, each trader learns some basics without which it is impossible to understand the financial market. Most beginners have certainly come across the term volatility when studying basic Forex strategies so it will be useful to clarify the concept.

Understanding the terminology

Essentially, volatility is the price dynamics of a certain asset within a selected timeframe. The longer the chosen period the wider the price range. To put it simply, volatility is the indicator of the change between the minimum and maximum value of a currency pair within an hour, day, week, or year. The value is expressed in pips or percentage points.

The Forex market is considered the most volatile in the world, which provides unlimited opportunities for earning. Prices change every second, and with the right strategies, you can quickly increase your capital.

The most volatile currency pairs can be profitable even on small timeframes. There are also some non-volatile assets in the financial market. They show a constant upward trend while the price fluctuations do not go beyond a certain range.

One of the most non-volatile assets is the EUR/GBP pair. Exactly the opposite is the GBP/JPY pair, which is very volatile and can move more than 100 pips per day.

Factors affecting volatility

Hundreds of factors influence asset price dynamics. The main ones are:

  • political;
  • economic;
  • psychological.

When studying what Forex volatility is, it becomes clear that you can develop a fairly successful behavioral strategy if you constantly follow the news.

In particular, price dynamics can be influenced by:

  1. Financial actions of the largest market participants, so-called market makers. In general, it is their speculation that ensures sufficient liquidity of any currency pair.
  2. Fundamental events in the world. As soon as a piece of news appears, the market moves, and the volatility of some assets increases. In particular, events such as the global pandemic or the launch of a printing press in the United States have significantly affected the volatility of currency pairs.
  3. Conducting trading sessions. In this case, it is very easy to monitor the volatility of currency pairs. You just need to consider which assets are listed on the European, Asian or American exchanges.


How to apply what you have learned

After understanding what Forex volatility is, you should not forget that there are several technical indicators in the market, which allow you to enter the market right on time and make more profit. A correct interpretation of their signals is the key here.

Any volatility indicator will show the general state of the market and help determine if your behavioral strategy fits the situation. If you are not in favor of long-term strategies, you just cannot do without volatility indicators.

With a volatility indicator, you can determine dozens of market characteristics, including:

  • trend strength;
  • breakout level;
  • trend reversal time.

It should be remembered that each indicator focuses on specific market characteristics. If you are used to working in different directions, you can use a few indicators at once, the most popular of which are ATR, Parabolic SAR, CCI, Bollinger Bands, Stochastic, OSMA, etc.

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