Volatility In Forex Trading - Shaping Movement
On a practical basis, volatility can have a number of consequences when trading the Forex market. In general, volatility comes and goes when day trading. Volatility can result in pattern formation, but it can also disrupt pattern formation. Volatility can result in strong directional moves, but can also result in oscillations. Volatility can be seen in a candlestick pattern, namely equal and opposite candles, which indicates the nature of volatility, that is it expresses the markets capacity to go up and down, with greater ranges than are normally seen.
However while trading on volatility can be problematic, it can presage moves which while they may be driven by volatility, are processed by the market into more tradable forms. That is, volatility can be seen at the beginning of a trend, which may have a structured form as traders and other market forces play out complex strategies on market volatility, with the possibility for the underlying nature of volatility to reverse patterns remaining. This is why volatility can be seen as an attractive market condition, but also why it can be problematic for traders.
The reduction of volatility which is a feature of markets can then result in quieter moves, perhaps turning trends into ranges and then quieter moves which may pick up as volatility increases, for example because a session is opening. Changes in volatility can also result in patterns and moves. For example, when a market closes, reductions in liquidity can force a reduction in volatility, but the market may express this in structured moves or sharp moves, such as drops. Reductions in volatility can becomes the opposite, thus letting moves emerge from changes in volatility.
Some of the times of greatest volatility in the Forex market are around news releases, when the market can move in unusual ranges of value and also with sharp reversals and oscillations. But it might be said that these features are simply the market as it exists writ large, amplified by liquidity. Thus liquidity can be seen as a cause but not actually volatility. This is perhaps because liquidity can provide the basis for volatility moves. Naturally liquidity can be seen as providing the potential for directional moves, yet the Forex market is complex and prone to complex moves which make for finding directionality hard. In fact liquidity can produce intense volatility, but in can also make for powerful directionality.
The problem for traders is that it is unknown what the effect if liquidity will be. Factors can be examined to try and find out, in effect, how these might shape liquidity, but these projections can be wrong. What shapes liquidity may be many factors including an underlying tendency for the market to move in complex ways, by virtue of what a Forex pair is, namely the relative valuations of currencies. Longer term directional changes in valuations can be seen, for example for interest rate changes on one currency, but these tend to be expressed in retracements and instability and time factors, making them difficult to trade.
This said there are trading strategies based around directional moves and retracements over the medium term. Over the shorter term, the trader can find patterns which emerge from volatility but without being too volatile and try and see if they can maintain structure in a perhaps inherently volatile market context, if volatility is seen not so much as based on liquidity but on structural factors which make for complexity in the way the Forex market moves. This very fact can make the Forex market interesting to traders, as it has potential across the day trading session and beyond, with the caveat that this complexity can make it hard to actually trade.
