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How Does Volatility Affect the Forex Markets?


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Foreign exchange markets, like all other financial markets in the world, are affected by volatility to a great extent. On some days, trading can be a bit of a “bore” – as volatility is low. Alternatively, on other days, volatility could be high – and therefore prices in the prop firm  FX world could fluctuate wildly.
But what actually is volatility, and who creates it? Furthermore, how do we predict volatility, and are there times where volatility is known to be higher than others?
Let’s take a look at the answers to these questions.
What is Volatility?
Essentially, volatility is a gauge of the degree to which prices are changing. For example, let’s take a currency pair – the EUR/USD – and see how volatility might appear.
Day One: EUR/USD trades between 1.3000 and 1.3100
Day Two: EUR/USD trades between 1.3000 and 1.3020
As you can see, the EUR/USD currency pair has traded in a 100 pip range on the first day, and then a 20 pip range on the second day. Which is the more volatile day? Obviously, the first day is. This illustrates exactly what volatility is – in its most basic context.
However, there is also one other consideration that volatility calculations take in to account. That is – how quickly the price changes. For example, going back to day one – if the currency pair gradually rose between 8am and 5pm from 1.3000 to 1.3100 – this wouldn’t be particularly volatile. However, if it traded from 1.3000 to 1.3030 in the first 5 hours of the day, and then suddenly went from 1.3030 to 1.3100 in the last hour of the day – this would indicate a high level of volatility.
Hopefully this illustrates how volatility is created, and why it has important implications for traders in all financial markets.
How to Predict Volatility
Volatility is somewhat difficult to predict, because even the slightest piece of news or rumour in the market can cause currency pair prices to escalate or fall dramatically. Hence – it is best simply to not try to put too much weight on predicting where volatility will go.
However, there are times where volatility is known to be higher on average than others. One of these times is when a major piece of news is about to be released to the market. Take, for example – the non-farm payroll release which comes out on the first Friday of every month. Before this data piece is released, the markets usually see a spike in volatility as last minute trades are placed before the announcement. In this manner – you could actually profit from increased volatility if you are on the right side of the trade.
3 Recent Changes in the Forex Trading Market
Just as many businesses, industries, and markets have changed since the financial crisis of 2008, the prop firm market has recently undergone a number of interesting changes. For traders, this doesn’t necessarily mean that their style of trading will need to change – but instead that they simply need to keep in mind the evolving dynamics of the market.
In this article, we’ll take a look at the 3 most important and potentially influential changes which have taken place recently. Understanding these could help to improve your position in the market.
Change One: Leverage Requirements
One of the most obvious changes in the Forex trading market is the fact that leverage – which was once very easy to acquire – is getting all the more difficult to find. Sure, there are still firms out there offering 200:1 leverage, however their numbers are slim.
These days, it is more common to find the following leverage denominations:
Essentially, what this means is that brokerage firms are becoming less “gifting”, and are settling for clients trading less on average – whilst still profiting from the spreads.
Change Two: Additional Volatility
Sure, we are certainly through the worst of the volatility, but that doesn’t mean that the market has returned to the previous level of calm that was present before the crash.
One of the biggest changes here is the fact that a currency pair could be trading upwards one day, downwards the next – and absolutely nowhere on the third day. This is in contrast to a constant trend which might have been experienced before. For traders, this means that they need to fundamentally adjust the way they place trades – and utilize stop loss orders and risk limiting trades more than ever.
Change Three: Broker Competition
The recent financial crisis has proven that whilst many traders are loyal to their Forex broker, many are not. The fact that a single feature in the Forex trading market could swing a trader from one broker to another is proof that the competition in the industry has really hotted up recently.
As we all know, competition is great for consumers, and in this case – it simply means that traders are getting a better deal on the whole, with lower spreads, commissions, and costs.

Wilmer Brennan
Wilmer Brennan
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