The term volatility is used to refer to price fluctuations over a specified period. In short, high volatility means that prices make large fluctuations. Conversely, low volatility means that prices make small fluctuations.
This behavior is usually measured by technical indicators, such as Bollinger Bands or moving averages. In addition, the volatility index or VIX is also used to predict how volatile price action is expected to be. This is determined by looking at the implied volatility of S&P 500 options for the next 30 days. A high VIX reading reveals that market participants are feeling uncertain while a low VIX figure shows that traders are in a stable market environment.
High volatility can have a material effect on your trading and necessary adjustments must be made in order to weather potential spikes in price action.
A possible starting point is to measure the average price movement of the currency pairs you normally watch. If you notice an increase in their daily price fluctuations, it could be a sign that you need to adjust your entry and exit strategies. You can monitor whether EUR/USD is still trading around its usual daily range or if it makes bigger moves for the trading day or session.
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 is also considered as a measure of market uncertainty and fear. High volatility suggests that price action reacts more to market data and events. During these periods, a low-tier economic release could still have a large and pronounced effect on price action as traders react more to it.
As a result, you might also want to consider being more conscious of upcoming economic reports and potential market movers. If you are expecting a report to have a material effect on price movement, you can lock in profits early or move your stop to entry to prevent sudden price spikes from resulting in a large loss to your account. Even though market environment can be unpredictable, you are still in control of your account when you practice proper risk management.
This behavior is usually measured by technical indicators, such as Bollinger Bands or moving averages. In addition, the volatility index or VIX is also used to predict how volatile price action is expected to be. This is determined by looking at the implied volatility of S&P 500 options for the next 30 days. A high VIX reading reveals that market participants are feeling uncertain while a low VIX figure shows that traders are in a stable market environment.
High volatility can have a material effect on your trading and necessary adjustments must be made in order to weather potential spikes in price action.
A possible starting point is to measure the average price movement of the currency pairs you normally watch. If you notice an increase in their daily price fluctuations, it could be a sign that you need to adjust your entry and exit strategies. You can monitor whether EUR/USD is still trading around its usual daily range or if it makes bigger moves for the trading day or session.
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 is also considered as a measure of market uncertainty and fear. High volatility suggests that price action reacts more to market data and events. During these periods, a low-tier economic release could still have a large and pronounced effect on price action as traders react more to it.
As a result, you might also want to consider being more conscious of upcoming economic reports and potential market movers. If you are expecting a report to have a material effect on price movement, you can lock in profits early or move your stop to entry to prevent sudden price spikes from resulting in a large loss to your account. Even though market environment can be unpredictable, you are still in control of your account when you practice proper risk management.
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