The forex market is undoubtedly a huge global entity, and one that sees an estimated $6.6 trillion traded every single day. This number has increased incrementally since 2015 too, when just $5.1 trillion was traded daily in the marketplace.
Interestingly, the increase is even more marked in developing economies such as South Africa, where some regulated forex brokers saw 100% growth through 2020 alone. Tickmill even reported a 27.43% increase in Africa, according to the location’s regional manager Christoforos Panagiotou.
At the heart of the FX market is its innate volatility, but how exactly can African traders leverage this to their advantage? Let’s find out!
What is Volatility in the FX Market?
Of course, volatility is a common term amongst financial market traders, albeit one that has slightly different meanings in relation to specific asset classes.
In the case of forex trading, for example, volatility is a simple measure of the frequency and extent of changes in a currency pairing’s value.
So, a currency could be attributed as having high or low volatility depending on how far its value deviates from the average, and this can vary considerably between major, minor and exotic pairs (we’ll touch a little more on this later in the piece).
Recently added assets such as cryptocurrencies have also introduced even higher levels of volatility, thanks largely to varying perceptions of the intrinsic value of crypto assets as a store of value. Such assets, which can now be traded seamlessly through the Webtrader MT4, can see their prices vary wildly in relatively short periods of time.
What are the Pros and Cons of Volatility in the FX Market?
While volatility is often sold as a negative of financial market trading, it can actually be a positive when dealing in speculative assets such as currency.
For example, the derivative nature of international currencies means that you don’t have to assume ownership of the underlying asset, enabling you to speculate on price movements and profit even in a depreciating market.
Because of this, scalpers and day traders can leverage individual price fluctuations in real-time, making small but incremental profits over the course of 24 hours.
However, higher levels of volatility do increase your risk as a trader, due to the underlying market uncertainty. Of course, the terms ‘risk’ and ‘volatility’ shouldn’t be used interchangeably, but they’re inextricably linked in the forex market.
Similarly, the forex market is a highly leveraged space, and one where you can open and control positions that are far larger than your initial deposit. This can increase the extent of your losses, while volatility may contribute to a higher rate of failure in the marketplace.
How Can You Take Advantage of Volatility When You Trade?
While controlling leverage is key if you’re to safely capitalise on volatility as a forex trader, it’s also important that you adopt a non-directional mindset.
This allows you to profit directly from the fact that prices will fluctuate wildly within a relatively short period of time, as you identify short-term price discrepancies and leverage these before they’re corrected.
Forex traders who want to use volatility to their advantage could also consider an event-driven strategy, especially with currency prices so vulnerable to economic data releases, macroeconomic trends and geopolitical events.
This affords you insight into the course that the market is likely to take in the short and medium-term, making it easier to understand specific price movements and utilise them to your advantage.