One of the concepts that Forex Trading practitioners are required to know perfectly is forex volatility. It can be a resource, but also a threat, an element as desired as a moment that brings catastrophe. It's important, specifically, to know what volatility actually is and when it plays a leading role. In short... When is the market most volatile?
Volatility in Forex
In a broad sense, a market is said to be volatile when prices vary considerably over time. For example, gold is said to be volatile when its price rises and falls frenetically.
Volatility is obviously measurable. Conventionally, statistics are called into question, specifically the standard deviation. This tool allows for objectively measuring volatility, i.e., the variability of prices.
The calculation is rather complicated, but fortunately, it is usually done by the platform. The only task of the trader, which is not trivial, is to decide the time horizon, i.e., the time frame and period to consider. In calculating the standard deviation, and thus volatility, how often should prices be detected? How many price detections need to be considered? The trader must answer this question based on their trading style and strategy. These same volatility readings also feed into position sizing, an approach covered in position sizing in volatile markets.
Volatility can be a positive element but also a negative one. To be honest, it is only positive for more experienced investors, able to take advantage of rapid price variations. For everyone else, a "crazy" price only generates confusion, false signals, and bankrupts their strategy. For strategies that can help capture volatile moves instead of being burned by them, see maximize profits in volatile markets.
Events That Cause Volatility in Trading
Is volatility predictable? To some extent, yes. Traders know, or should know, that some events by definition generate volatility. If these events take place on a regular basis, then one only needs to avoid trading in their vicinity. Or, if you are experienced enough to predict the outcome of events, it is possible to try to ride the wave.
The "unexpected" events that generate volatility more than any other are political crises, stock market crashes, scandals, natural catastrophes, leaks of news with some economic implications. For example, if a prime minister resigns, it is likely that there will be great volatility. Beyond specific events, certain hours of the trading day are also more prone to sharp swings, as explained in market hours when volatility is highest.
Expected Events and the Anticipation Paradox
Among the expected events, the conferences of the central banks rank first, as they are very important, being the stage for monetary policy announcements. Changes in the cost of money, decisions on any securities purchase programs, economic forecasts... These are all events capable of moving the market, in some cases shaking it to its foundations.
In the latter case, it is possible to take advantage of the moment. Launch into a prediction and trade accordingly, taking advantage of the large price movements. But here is the paradox: to predict, it is good to get informed and take analysts' estimates as a reference. However, if the estimates are shared, the market discounts the event well in advance before it occurs, so episodes of volatility decrease.
