Global exchange for trading currencies is also referred to as forex or FX markets and is the biggest financial market globally. Forex is a type of foreign exchange trading where traders use currencies intending to make a profit through trading in the belief that the exchange rate will increase.
However, events at the global market level can act as a threat to expected changes in forex and the trading direction. Events and situations influence forex trading worldwide due to the size of the market and the diversity of traders from all over the world. This paper also discusses some of the major drivers of forex volatility wherever it happens.
Forex Volatility: the most significant factors
Some of the most influential economic indicators that have been attributed to causing forex volatility include the following aspects: economics, politics, global markets, and trading methods. For instance, the fluctuations of interest rates by central banks, employment statistics, elections, shifts in commodity prices, and the overall risk tendencies of investors are some of the common determinants of fluctuations in the volatility of a given currency pair.
Economic Indicators
Central banks influence foreign exchange rates by determining interest rates, and forex risk is hereby determined by interest differentials between countries. For instance, when the U.S. Federal Reserve lifts the interest rates, there may be an increase in demand for the USD.
Economic indicators such as U.S. Non-Farm Payrolls may strongly affect the pairs such as EUR/USD if their values differ significantly from the forecasted ones. Employment has been identified to cause an increase in currency rates, especially when employment is strong.
Geopolitics
Features such as elections, war, policies, or leadership crises can create higher volatility and fluctuation of forex because investors always engage in the purchase/ sale of safe and unsafe currencies. For example, in 2016, the whole market observed more volatility and trading volume during the U.S. election.
Global Markets
A decrease in the price of commodities, stock market crash, or bursting of the bubbles in cryptocurrencies can cause an over-whelming shift in international capital flows between assets and thus cause volatility in forex rates. Normally, risk perception tends to drop on such occasions.
Trading Strategies
- Trade volatility to advantage, but be cautious by controlling risks through the application of stop losses. This also leads to the idea of either cutting position sizes during events or avoiding them altogether.
- Hedge the specific currency pair risks through the use of instruments like options and currency futures.
- Technical analysis may determine the support /resistance where trade reversals are likely to occur.
- In fundamental analysis, the main concept is working on the basis of economic factors that lead to volatility.
The value of the forex market is that it offers opportunities that relate to the most significant and important events on the global level while it also involves certain levels of risk. Thus, recognizing the processes going on in a commodity market, traders can try to make money with the help of volatility spikes, and also, at the same time, not get in the red.
Final Thoughts
In conclusion, it is necessary to state that opportunities connected with the major events are directly connected with the size and the scope of the forex market, yet they are accompanied by risks tied to the fluctuations in the volatility characteristic of the major events. It is possible to try and make money out of Forex by experiencing volatility while minimizing the losses arising from them through the use of stop losses, hedging, and technical and fundamental analysis of the economic factors. Being aware of the events that occur in the global world can allow traders to attempt to benefit from the possible volatility in forex without compromising on its risks.
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