Wednesday, May 27, 2020

Forex Market Volatility

Forex Market Volatility

 

Forex refers to foreign exchange or currency exchange. The market in which foreign currencies of world are traded. It is considered the largest and most liquid market in the world. There is no centralized market , rather it is an electronic network. And wherever the trade of two foreign currency are traded. It eases the investment and trade for every country. This exchange market is the main infrastructure for global trade. And support’s import and exportmany country.Next term to focus on is Volatility, but before that we should understand about liquidity.


Liquidity refers to how active market is, which is determined by how many traders are actively trading and the total volume they are trading. Or a currency pair’s ability to be bought and sold without causing a significant change in it’s exchange rate.Whereas volatility refers to amount of uncertainty or risks involved with the size of changes in currency exchange rate. Liquidity has big impact on how volatile the market prices are. Lower liquidity results to more volatile market and causes prices to change drastically or lower volatile means, than an exchange rate does not fluctuate but changes in steady pace over period of time.Example suppose that an investor is building a retirement portfolio. Since he is retiring within next few years , she’s seeking stock with low volatility and steady returns.

She considers two companies :

·       Microsoft Corporation (MSFT) has a beta coefficient of 1.03 , which makes it roughly as volatile as the S&P 500 index.

·       Shopify Inc. (SHOP) has a beta coefficient of 1.88, making it significantly more volatile than the S&P 500 index.

 

The investors would likely to chose Microsoft Corporation for their portfolio since it has less volatility and more predictable shot term value.

Volatility is often calculated using variance and standard deviation. The standard deviation is the square root of the variance. Find the mean of the data set. This means adding each value, and then dividing it by the number of values. Calculate the difference between each data value and the meanSquare the deviations. This will eliminate negative values.

For profitable trade there are fixed hours in which many of them have become successful in Forex. And many failing because they are trading during the wrong time of day. Most traders should trade during volatile 2 pm to 6 am (New York) eastern time, which is 7 pm to 11 am UK time.

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Now for profitable trade there are indicators which can be used for judging the market pattern, strength of trend, identifying possible ranges or boundaries of the market. These indicators include, the Parabolic SAR indicator, the Momentum indicator, Volatility channels, the Average True Range indicator (ATR). The Momentum indicator is a straight upward measure of volatility, it does also measure direction as well as rate of change. A Forex volatility meter that produces directions and tell you purely about the magnitude of volatility is the Average True Range indicator (or ATR).

No doubt in the past months- volatility in the foreign exchange market has been falling. The slowdown is evident across the board in all the currencies. It’s making life particularly difficult for retail traders, it has narrowed trading range than any time since.

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