Hurricanes, North Korea, interest rate concerns, and similar global events continue to cause mounting uncertainty and market volatility. For investors who understand the value of volatility from an investment perspective, however, the current market climate is a case study in how to navigate it correctly as a measure of achieving positive returns. What does this all mean for investors? In our view, now that summer is over and the kids are back in school it’s time to hunker down and close out 2017 with a bang. Volatility should be viewed as a trader’s best friend and a means toward a portfolio boost.
In Forex trading, volatility refers to the amount of uncertainty involved with the size of value change in a currency exchange rate. Lower volatility means that a cross rate (currency pairs) do not fluctuate forcefully, but will change in value at a steadier pace during a measured period of time. Alternatively, higher volatility means that a cross rate is fluctuating greatly with a fast moving price and often in a trending direction. Proven Forex trading systems thrive in these market conditions. By definition, volatility is a statistical measurement of the movement of price for any given asset otherwise dubbed by some as a “Market Anxiety Meter.” If volatility is low, the markets are calm and steady. If volatility is high, markets are fast and moving. Understanding how to ride the volatility is critical to success.
Consider the facts. Earlier this week, the U.S. dollar fell against other major currencies and the Federal Reserve reiterated its stance that any interest rate increase will be delayed until there is confidence that inflation will rebound. Additionally, the EUR/USD increased 0.26% to 1.1944 and the GBP/USD remained at 1.3038 following a month-long high. The USD/CAD held steady at 1.2375 and the U.S. dollar index, which measures strength against a trade-weighted basket of six major currencies, was down 0.15%.
Volatility is a gauge for making price entries into the market in the world of Forex trading. For example, when the market moves and breaks a high or low price level, it represents one way to confirm a directional market movement. However, if price breaks that level with low volatility, this typically means that market conditions will reflect a slow move or possibly signal a trend reversal. Should these same price levels with volatility increase at the same time, the probabilities are generally much higher that the market direction will continue in a fast aggressive motion.
Typically, if Forex traders see market directional confirmation and an increase to volatility, they will add additional positions to the trending direction. As long as price continues to move in the expected direction and volatility are continually increasing, it is prime time to enter trades.
When investing, it is essential to focus on the long term and be sure the managers with which you invest are also experienced and in it for the long haul with systems that have been stress-tested in a variety of market conditions. As quant investor Robert Arnott once said, “In investing, what is comfortable is rarely profitable.” Indeed, the truth is that buying in turbulent times can be quite profitable but never take your eye off the ball.
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