Forex Market Volatility

Filed under: Learn Forex Trading |

Screen shot 2013-06-10 at 10.07.31Sometimes, the forex markets become volatile – so volatile that they become virtually unplayable and trading becomes more akin to gambling. So what should you do when the markets become volatile? I say… “Step aside”. There is no point trying to find setups when the markets are up and down, spiking and crashing, rising and falling again with no apparent pattern. This can happen during world news events (such as the tsunami in Japan a few years ago), which can sometimes affect the economic outlook. During such events, the average true range of candles become larger, but this is often difficult to spot because charts tend to adapt to this and be presented in a way that looks ‘normal’. What I mean by this is that you can only see the extreme volatility present if you zoom out and compare the current candles to previous ones.

 

During extreme market volatility, it becomes difficult to find high probability price action setups, and support/resistance levels tend to hold less weight. In effect, our market edge is lost, and as such, it is better to stand aside – even if you do find a textbook setup. During volatile events, stop losses can more easily be taken out with wild swings in the market, and in extreme cases, your stop loss might actually be gapped past (which could result in big losses).

 

Of course, a little volatility can make for some good, profitable trades. However, it is the extreme volatility that I stay away from, and this should be reiterated. During extreme volatility, charts start to look extremely messy and without pattern. Fortunately, this is usually quite easy to spot, and as mentioned, you can check the levels of volatility simply by zooming out on your chart and comparing the current conditions to past conditions.

Leave a Reply

Your email address will not be published. Required fields are marked *

You may use these HTML tags and attributes: <a href="" title=""> <abbr title=""> <acronym title=""> <b> <blockquote cite=""> <cite> <code> <del datetime=""> <em> <i> <q cite=""> <strike> <strong>