Volatility refers to the amount by which an asset price fluctuates at a given period in time. In other words, a volatile market environment means that price fluctuates by a huge amount compared to periods of lower volatility in the markets.
Volatility is determined by taking a look at chart indicators, namely moving averages or Bollinger Bands. On top of that, the VIX or volatility index can be used to estimate future volatility. The VIX is calculated by using the S&P 500 options implied volatility for 30 days. This shows how market participants are expecting price volatility to fare in the coming trading days. A high VIX shows that theres a lot of uncertainty and that more volatility is likely while a low VIX means that market price action is expected to be more stable.
Periods of increased trading volatility can make an impact on your trading performance so you need to make some adjustments in your trading style during these times.
A good way to start is to take a look at how the average movement of a particular pair has changed in the past few days compared to other periods. For instance, GBP/USD could be moving at 50 pips a day during less volatile days but could fluctuate by as much as 100 pips a day for more volatile market days.
With these observed changes in average price movement for the day, you can then adjust your usual entry and exit levels. For instance, you can decide to set wider stops for days wherein more volatility or price spikes are expected. You can also decide to go for smaller profit targets or hold on to trades for shorter periods of time, as price action is likely to turn quickly.
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.
Volatility is determined by taking a look at chart indicators, namely moving averages or Bollinger Bands. On top of that, the VIX or volatility index can be used to estimate future volatility. The VIX is calculated by using the S&P 500 options implied volatility for 30 days. This shows how market participants are expecting price volatility to fare in the coming trading days. A high VIX shows that theres a lot of uncertainty and that more volatility is likely while a low VIX means that market price action is expected to be more stable.
Periods of increased trading volatility can make an impact on your trading performance so you need to make some adjustments in your trading style during these times.
A good way to start is to take a look at how the average movement of a particular pair has changed in the past few days compared to other periods. For instance, GBP/USD could be moving at 50 pips a day during less volatile days but could fluctuate by as much as 100 pips a day for more volatile market days.
With these observed changes in average price movement for the day, you can then adjust your usual entry and exit levels. For instance, you can decide to set wider stops for days wherein more volatility or price spikes are expected. You can also decide to go for smaller profit targets or hold on to trades for shorter periods of time, as price action is likely to turn quickly.
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.
About the Author:
To find out what market behavior is and how it can affect you, simply click the link.
This forex tips are very good and informative...i find them very useful and informative.
ReplyDeletehttp://www.ask-fx.com