Not only is the $6.6-trillion forex market one of the biggest global entities of its type anywhere in the world, but this is also one of the most volatile and fast-moving sectors too.
While this is often perceived as a negative amongst investors (especially inexperienced ones), it can actually be leveraged to create a distinct advantage, especially in terms of profitability and short-term gains.
But how exactly do you capitalise on volatility in the forex market, and what tools do you need to help you achieve such an objective?
What is Volatility in the Forex Market?
In general terms, volatility is a measure of dispersion around the mean or average return of a security, and this can be far more pronounced in some markets than others.
In the forex market, volatility tends to be quite pronounced, while it can be measured using the standard deviation (which signals how tightly the price of a stock is grouped around the mean or moving average).
When currency prices are tightly bunched together, the standard deviation is small. However, there are instances where prices can vary wildly, creating greater volatility and disruption in the marketplace.
This can be beneficial in numerous ways, as an increase in volatility makes it possible to optimise your profitability in a relatively short period of time. This is thanks largely to the derivative nature of international currency pairs, which enables traders to speculate on price movements without assuming ownership of the underlying assets.
In simple terms, this means that you can speculate on volatile price shifts without incurring significant levels of risk, potentially generating a large number of small profits over the course of minutes or hours.
Certainly, increased trading volumes and subsequent volatility make it possible to generate an above-average profit, and this can be optimised further by inflated leverage.
How to Take Advantage of Volatile Markets
If you intend to leverage volatility to your advantage, the first thing that you’ll need is a powerful and intuitive trading platform like the MetaTrader 5.
This will afford you access to a diverse range of analytical tools and technical indicators, which can be used to inform individual trades and underpin your strategy as a whole. Most importantly, these tools provide access to tools, charts and news releases in real-time, which is crucial if you want to fully leverage volatility to your advantage.
After all, even relatively small and short-term price shifts can deliver incremental profits, while also enabling you to minimise risk and exposure in the process.
With a licensed trading platform, you can also utilise a demo account to hone and test new strategies in a simulated, live and risk-free environment.
You can also take this opportunity to hone short-term scalping and day trading strategies, which are crucial when looking to operate profitable positions in the short-term.
You should also focus on identifying potential breakouts after periods of consolidation, as this can be an effective strategy when hoping to make volatility work for you.