Warren Buffett was once quoted as saying: “Look at market fluctuations (volatility) as your friend rather than your enemy.”
While he was talking about markets in general, Buffett who is also known as the Sage of Omaha, could well be talking about volatility in the forex markets.
Volatility (market fluctuations) can indeed be your friend when trading the global forex market. But you have to know how to harness it and make it work in your favour.
In simple terms volatility refers to the price fluctuations of assets. It measures the difference between the opening and closing prices over a certain period of time.
For example, a currency pair that is fluctuating between 5-10 pips is less volatile than an FX pair that fluctuates between 50-100 pips.
If you look closely you can see that some currencies and currency pairs are more volatile than others. You must have heard of the term ‘safe haven’ which refers to some currencies like the Japanese Yen, the Swiss Franc and the US dollar (to a certain degree).
On the other hand, emerging market currencies such as the Turkish Lira, Mexican Peso, Indian Rupee and Thai Baht are considered more volatile than the safe haven currencies.
So, depending on your trading style, strategy and trading preferences, you can always find a currency pair that will suit your trading technique.
Quoting Warren Buffett again, he said: “All time is uncertain. It was uncertain back in 2007, we just didn't know it was uncertain.”
The fact is uncertainty, volatility, fluctuations or whatever you call the range of price movement – they are all intrinsic parts of trading the markets.
No volatility means there are no price movements. And without price movement it will be impossible to have any trading activity.
The thing to keep in mind is that a certain level of volatility is needed for markets to operate efficiently. The challenge for traders though is when volatility becomes too high.
As an FX trader, you need to be aware of which currencies are more volatile than others and when volatility is rising.
Given the nature of the current global markets – interconnected trades, seamless flow of information and communication and the prevalence of social media and digital technology – market pundits agree that market volatility is very much in every trader’s mind these days more than in any other period of time.
And why not? Let’s look at some of the factors that cause volatility that can affect your FX trading.
Knowing the inherent nature of volatility and the factors behind it, how can you use it in your favour? How can you harness volatility in your FX trading?
If you heed Warren Buffett’s word and look at market volatility as your friend rather than an enemy, there must be ways to make it work for you and your trading success.
In conclusion, knowing that volatility is what makes trading the global markets possible, it is in your best interest to use and harness it in your favour. Knowing the factors behind them and how you can use them to your trading gives you an edge as an FX trader.
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