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Forex trading is a critical aspect of any trading environment which traders should understand. It refers to the degree of variation in the exchange rate of currency over a period of time.
High volatility signifies the change in currency price over a short period of time. At the same time, low volatility indicates fluctuations in currency price along with changes in value at a steady pace over a period of time.
Now, if you look closely, you can see currency pairs are more volatile than the other. For instance, Japanese Yen, US Dollar, and Swiss France. On the other hand, exotic currency pairs like Mexican Peso or Indian rupee are more volatile than the safe haven currency.
While some traders are volatile, and others might not prefer any type of high risk that comes with high volatility. In this article, you will discover the cause and effect of forex market volatility and its impact on forex traders.
Cause And Effect Of Forex Market Volatility
Considering the nature of the current market situation, it comprises interconnection trades, the prevalence of social media, the seamless flow of communication and information, and the presence of digital media.
Moreover, as a forex trader, you must know which currencies are more volatile and when the volatility might increase or decrease. Here are some factors that cause and affect volatility in forex trading.
1. Geopolitical Factors
Geopolitical crises and events can introduce important volatility within the forex trading market.
For instance, you will see that during the election, terrorist attacks, wars, and other significant political events are some of the causes of volatility.
This is because a certain level of volatility is required in the markets, along with a group of uncertainties, which might be an unknown situation for the traders.
Similarly, the crisis can create uncertainty about the future economic outlook of a country. This further leads investors to either buy or sell currencies on the basis of their perception of future financial health.
2. Considering Market Sentiments
Considering the overall attitude of investors towards a significant financial market is another critical driving factor in forex volatility.
But if, as a trader, you feel bullish about a specific currency, you will tend to make a purchase and increase its value.
However, if you feel bearish, they will drive and sell down its values. This collective selling and buying can lead to a significant variation in pricing.
To know more, you can visit robomarkets.com and find out the currency pairs that are more volatile than others.
3. Actions Taken By Central Bank
The central bank has significant power in the forex market. Their actions often result in increased volatility.
Furthermore, central banks manage a country’s monetary policy, and any alterations in interest rates can cause drastic effects on the currency values.
For instance, if the Federal Reserve raises interest rates, it can lead to an appreciation of the US dollar as it becomes more attractive to investors seeking higher returns.
4. Breach In Technical Levels
As conducting technical analysis on forex trading is a crucial step, the significant price levels, such as resistance and support levels, can be closely observed.
These levels represent psychological barriers when breached, and they can lead to increased trading activity and higher volatility.
However, when there is a price breach, it leads to a significant level of suypoort which is often viewed as a signal that the current trend might be getting stronger.
5. Economic Indicators
Economic indicators play a significant role in influencing forex traders. These include data points such as:
- Gross domestic product (GDP)
- Consumer price index (CPI).
- Manufacturing indices.
- Retail Sales.
Traders and investors can witness these indicators closely as they provide information about the economy's health.
The forex market is driven by an economic and political factor that impacts the value of a nation’s currency.
Hence, the economic outlook for a currency is mostly influenced due to the value of currency. However, knowing the factors and indicators can help you maintain pace with the competitive and fast-moving world of the forex trading market.
If there is high volatility, it can offer potential profits but also increase the chance of substantial losses. By understanding the driving factors of volatility, traders can better predict the possible price movement and adjust their trading approaches accordingly.