The term “volatility” is defined as a measurement of how much risk an investor faces when trading in a certain market. The risk in itself is a solution that comes from the distribution of prices that are measured from the standard deviation. Standard deviation is another factor, regarding the full definition of volatility, as the average deviation that stems from the mean – in other words, volatility. Why should a trader keep tabs on the amount of volatility in the market? A simple trend-following strategy should suffice to be a profitable trader, no? Well in the case of being accurate in this type of investments, measuring the amount of fluctuations that occur within a given period can make a world of a difference to the final outcome of a trader’s session.
The higher the amount of volatility, the greater the risk each market entry faces in its duration. On the hand, having a high volatility in the market also brings about higher chances of earning a profit without having low price spreads. Some look at volatility as opportunities being offered on a silver platter, while others view it as a plague that must be avoided at all costs. No matter which side you choose from, we’ll be taking a look at the benefits of volatility and why it’s a key factor that should always be accounted for in every trading approach.
The Main Event – Volatility
Often associated with negativity, volatility is simply a measurement of how much uncertainty there is in an asset’s market. A trader’s forte is observing the trends, determining when the most optimum time to enter a trade is, and what the success rate is. Unlike most markets, forex traders perceive volatility, specifically the higher end of the spectrum, as a favorable environment. How? The more movement that the price of the underlying asset has, the higher the probabilities there are to make a good profit.
Recall that traders look at trends to determine when they can have the highest winning chances in their trades. The main reason for this is that trend trading will always be on your side. The common phrase, “the trend is your friend, until it ends” brings more meaning to this trader phenomenon. Volatility in the market causes all of the guidelines and confidence that traders use in their regular strategies out the window. The volatility of a market doesn’t imply the direction – it only defines how much fluctuation occurs in an asset. With a high volatility, short term traders can take advantage of the elevated margin levels, earning faster profits with great probabilities. In summary, if a trader is looking for long-term investments, with a conservative approach, a market with low volatility will show a lot of promise. For more aggressive traders, looking to make fast profits, high volatile markets will be the best choice. Either way, volatility plays an important role in the trading decisions of every investor.