It is not a secret that the Forex market is one of the most volatile due to its liquidity of more than 5 trillion dollars per day. It is a market volatility that does not present the futures or stock markets and that is why it is so attractive to the retail trader that seeks to make a profit in a short time. However, to have the volatility in your favor it is important to highlight that it can be a double-edged sword when trading. As with leverage, if you have a huge Forex volatility in an asset and it plays in your favor, then the gains can be exponential.
What is the volatility of an asset?
The volatility of the market has to do with the variation of a price with respect to its average in statistical terms. In short, volatility is related to the speed at which an asset moves, be it a currency pair or an action and it is expressed in pips or in percentage. There are indicators such as the CBOE volatility index or the VIX that give an overview of the general scenario in which the assets are moving. They are indicators of appetite or aversion to risk in financial markets. You can read the Avatrade review for more such details and solutions.
Who or what causes volatility in financial markets?
There is a misconception of traders with respect to the origin of volatility in trading and it is that this has to do with the broker when the reality is totally different. In fact, you have had situations such as the decision of negative interest rates of the National Bank which brought with it a huge wave of volatility that shook the markets sharply. This hurt many brokers who had not foreseen this decision of the central bank and some even declared themselves insolvent in a matter of seconds. Therefore, it is important to note that trading volatility is generated by the strength of supply and demand that exists at the moment, depending on the general sentiment of the large investors that move the Forex market.
Conclusion: how it can overcome?
A broker interprets that volatility in Forex through the graphs shown which are generated by the different liquidity providers to which the broker is subscribed. The volatility of the Forex market does not determine your probabilities of gain or loss in a certain currency pair in the case of the Forex market. Volatility in Forex is higher because there is a game 24 hours a day, 5 days a week where bears and bulls are actively trying to determine the path of a trading instrument in the short, medium or long term. In conclusion, the volatility of the market determines the range in which you can take advantage of opportunities to trade.