Volatility : Generalities

The volatility is an important component in trading.

It represents the measure of the exchange rate fluctuation amplitude.

In general, this term frightens but volatility can turn into the trader’s ally if he knows how do use it.

It is said that the Forex is a volatile and risky market. The following table shows the value of the average daily volatility in 2008, which was a particularly volatile year on markets in in general.

The different supports are classified according to crescent volatility. The three more dealt crosses on the Forex : the EUR/USD, the USD/JPY and the GBP/USD have the same volatility level as the American Treasury bill. They are followed by the share indexes, the great firms shares, raw material and to finish by small and medium capitalization shares. In 2008, the EUR/USD volatility was twice or three times inferior to the shares one. In comparison with other markets, the Forex isn’t volatile.

Nevertheless, trading on the Forex isn’t totally safe but risks are not due to volatility but to leverage used by the stakeholders. Leverage is a good tool to compensate the low volatility of the Forex; when it is well used, it can generate great achievements. On the other hand, when leverage is not correctly used, it can ruin the trader.

The trader is not able to make the Forex volatility fluctuate but he can adapt his leverage according to this volatility and his trading style. The possibility to make one’s leverage is a sizeable advantage of the Forex as it enables the stakeholder to adapt to the market different conditions.

Usually, volatility has a bad image but in reality, it is only information about the market. Sometimes, stakeholders unfairly don’t care about this information but it can make them adapt to the market conditions and make the stakeholders’ trading firmer. Thanks to the recognition of the volatility, the trader can modulate his market perception; make his trading system and his positions size vary….

The observation of the volatility variations can also be an indication on the future evolution of the rates.

To sum up, volatility is a very important component in trading, as well for the risk the choice of the points to enter in position as for the rate trends evolution.