Watch Out for Forex Volatility

The surging prices of Forex volatility can destroy your trading account. You need to take steps to protect your capital. The calculation of Volatility is based upon statistical formulas, but basically it refers to the measure of price change over a period of time.

Forex volatility can get quite extreme. It's not unusual for prices to change by a complete percent within a matter of minutes. Usually this happens around economic data releases, which is why new traders should stay out of the market at these times, as a way to help their Forex trading.

Forex volatility has been expressed in terms like "The Forex market will jump 40 pips before it even gets out of bed in the morning!" OK, a bit of a joke, but you get the message.

Volatility is Greatly Impacted by Liquidity

The high volatility experienced around data releases is a product of reduced liquidity of the market. Since the market makers often take the opposing side of speculative trades, they tend to increase their order fill times during data releases. This reduction effectively chokes off some of the liquidity of the market, which causes supply/demand problems for currencies.

Forex prices will typically move up and down within about a 300 to 400 pip range each month. There are exceptions, but this is the general range. Your trading plan needs to accommodate this range, without placing your capital at excessive risk.

Allow for volatility. Do this by keeping your leverage low, your stop loss out of the way and beware of the volatility during the major data releases.



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