How Volatility Affects Forex Market?

October 11, 2018

What does volatility mean in forex?

 

Volatility (in Forex trading) refers to the amount of uncertainty or risk involved with the size of changes in a currency exchange rate. A higher volatility means that an exchange rate can potentially be spread out over a larger range of values. High volatility means that the price of the currency can change dramatically over a short time period in either direction. On the other hand, a lowervolatility would mean that an exchange rate does not fluctuate dramatically, but changes in value at a steady pace over a period of time.

 

The market’s estimate of how much a currency pair will fluctuate over a certain period in the future is known as implied volatility. For online investors, a volatile market means both potential risks and an abundance of opportunities. Many traders follow market news and economic calendars in an attempt to recognize potential volatility, benefit from it and stay ahead of the market. Volatility is a useful concept for forex traders that can give them a sense of the risk involved in trading a particular currency pair.

 

The term “Volatility” most frequently refers to the standard deviation of the change in value of a financial instrument over a specific time period. It is often used to quantify (describe in numbers) the risk of the currency pair over that time period.

 

Volatility (in forex trading) refers to the amount of uncertainty or risk involved with the size of changes in a currency exchange rate. A higher volatility means that an exchange rate can potentially be spread out over a larger range of values. High volatility means that the price of the currency can change dramatically over a short time period in either direction. On the other hand, a lower volatility would mean that an exchange rate does not fluctuate dramatically, but changes in value at a steady pace over a period of time. Commonly, the higher the volatility, the riskier the trading of the currency pair is.

 

Forex traders traditionally chose currency pairs for their investments on the ground of classical risk/return analysis. Moreover, both return and risk are assessed in each separate moment or, in the best case, for certain discrete time series. In reality, actual price quotations change constantly at a different pace: sometimes quickly, sometimes slowly. That is why among all other market characteristics a lot of attention should be paid to volatility as a quantitative measure of past, current and future price range of a currency pair.

 

The most volatile currency pairs are GBP/JPY, EUR/NZD and GBP/AUD. 
The least volatile currency pairs are EUR/GBP, NZD/USD and EUR/CHF.

 

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