2022 has been a year of great upheaval in financial markets. Most major economies are battling historic inflation because of the Russia-Ukraine conflict, while some, like the UK, had self-inflicted damage in currency prices because of policy decisions.
This volatility is bad for economies but can be a boon for Forex traders. Forex trading is not a unidirectional activity because it relies purely on currency price movement, and traders don’t necessarily buy the underlying currencies. This industry has grown significantly in the internet age, and looking at any list of the best Forex brokers shows how vibrant this sector has become.
It is part of a wider trend of commerce migrating online. Most of the leading companies globally have tech or internet affiliation, and hundreds of millions rely on various online businesses to survive.
Understanding currency volatility
Volatility points to a lack of stability. Currency volatility points to a situation with frequent changes in the Forex market exchange rate. For instance, the UK Pound fell to go a historic low of $1.04 against the US Dollar on 26th September 2022, having traded above $1.2 most of the year. Such unusual exchange rate shifts present periods of high volatility.
The volatility is relative because developed economies’ currencies are expected to be relatively stable. Developing countries tend to have worse volatility, and they form a small part of the Forex market. In standard times, the currencies of the US and major European and Asian economies are relatively stable. However, the past couple of years has been anything but normal. The economic turmoil brought upon by the Covid pandemic and later the conflict that started this year have made the short-term future full of uncertainty.
Forex volatility affects some currencies more than others. For a trader, it is time to be on the lookout for opportunities with larger price movements. The increase in the range of movements is the hallmark of volatility. During periods of volatility, there are more opportunities and greater risk. These two need careful balancing to avoid getting burnt. You have just as big a chance of magnifying your losses if you are not careful.
There is also an element of herd mentality during periods of high volatility. This phenomenon is replicated across multiple markets. Crypto traders, for instance, display a similar herd mentality during periods of significant rallies or market crashes.
Therefore, the ultimate balance is knowing what risk to take in a volatile market. The temptation to panic and make the popular decision can be overbearing.
How to keep afloat in a volatile market
In financial markets, information is power. Currencies don’t move arbitrarily, and plenty of real-world events factor into these movements. Therefore, Forex traders are well served if they keep abreast with events and news. For instance, any step toward resolving the Ukraine conflict can affect Forex markets significantly. The Russian Rouble was devastated early this year when a wave of sanctions came from Western countries, but it has since recovered significantly.
To counter the effects of herd mentality, retain some analysis in your decision-making even in strange times. Analysis using charts and indicators can reveal subtle trends that waves may not. The place for analysis should remain because making emotional decisions can ruin trading. There are incredible tools online to learn how to analyze financial markets, and everyone should take advantage of these.
Forex trading brokerage platforms also have valuable tools to manage risk. The stop loss is the most famous because it can close your position automatically when losses get to a certain extent. Take Profit is another tool that allows a trader to exit the market when they achieve their target rather than overplaying their hand and losing the gains. These tools are handy in a volatile market.
Volatility can be Good
Volatility can be a good thing when handled well. For Forex traders, it is not a time to overreact. Ultimately, all strategies you adopt should aim at taking an amount of risk you can handle. The tips above provide general pointers, but each trader can customize their strategy to suit specific trading needs.