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Trading Major Currency Pairs During Increased Volatility


Volatility in the forex market refers to the price fluctuation about the mean – upswings and downswings. The greater the whipsaw movements, the greater the volatility. In fairness, volatility is essential for forex markets to operate efficiently.

Without volatility, there is a minimal relative advantage when trading. FX volatility refers to the frequency and degree of price changes between currencies. Increased volatility invariably leads to higher risk, but it also presents profitable opportunities for forex traders.

Volatility in the forex market refers to the price fluctuation about the mean – upswings and downswings. The greater the whipsaw movements, the greater the volatility. In fairness, volatility is essential for forex markets to operate efficiently.

Drivers of Currency Market Volatility
Forex volatility can be challenging to identify, owing to its unpredictability. Experience has taught us that volatility is generally lowest with the major currency pairs as opposed to the minor and exotic pairs. Forex pairs with low liquidity have higher attendant volatility.

A classic example of this includes the USD/ZAR (US dollar/South African rand), USD/TRY (US dollar/Turkish lira), or the USD/MXN (US dollar/Mexican peso). Since there is lower liquidity, there is higher volatility.

 

History tells us that specific currency pairs are associated with low volatility, while others are associated with high volatility. Therefore, when trading currency pairs under volatile conditions, it’s important to gauge support and resistance levels to assess the degree of volatility.

 

This is especially true with low volatility pairs such as forex majors. However, when price changes are erratic – like what we are seeing with the emerging market currencies – setting stop loss levels can be a little tricky owing to the rapid price movements.

The main drivers of volatility
– Rising inflation – the Fed established an ideal inflation-rate target of 2%
– Rising interest rates – these erode the current value of future cash flows
– Slowing GDP growth – economic contractions tend to pare gains in markets
– Quantitative tightening – tightening the money supply by raising interest rates
– Supply chain bottlenecks – disruptions to supply lines hamper economic growth

Market volatility grows whenever a major disruptive event occurs. Unfortunately, many of these have taken place since the pandemic, including the crypto crash, the Delta coronavirus variant, the Federal Reserve Bank’s interest rates hikes, the Omicron coronavirus variant, the Russian invasion of Ukraine, and more recently inflationary pressures and slowing economic growth.

 

Indeed, the Global Economic Prospects report by the World Bank estimates that global growth should slide from 5.27% in 2021 to 2.9% in 2022.
The World Bank: Stagflation Risk Rises Amid Sharp Slowdown in Growth

Bottom Line
It is impossible to eliminate uncertainty in the financial markets. Every trader will endure losing trades, irrespective of the planning and preparation that is undertaken. Markets are a force unto themselves. They defy explanation, often behaving illogically and irrationally. In addition, the sheer size and scope of the markets make it impossible to determine the specific action/reaction elements at any time.

However, planning and preparation can help. Using a demo trading account is always advisable before trading for real money. The objective is to minimise losing trades and maximise winning trades such that the net effect over the long-term is positive. It’s about focusing on the right forex tactics and strategies.

Technical and fundamental analysis are necessary with forex trading. From a technical perspective, price movements are assessed, but from a fundamental perspective, it’s the drivers of those price movements that traders focus on.

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Source: Information, Drawings and Images
All article information is sourced and available for review from referenced locations.

– Information and Images supplied.

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