Forex is a surprising and authentic market. It has a great potential and is able to open quite wide prospects for the future development for its participants. The only unpleasant thing about the Forex market is a necessity of making money with a constant look at the risks that are not so small, one should say. To reduce risks a clever trader should thoroughly study all the elements of the trading. The correct labour organization can help make the risks more reduced. In this case big profit potential will cover regular losses typical of trading activity over and above.
Now many articles are dedicated to risk management, psychology and other things. Nevertheless most new comers tritely fail due to the incorrectly chosen trading instrument. It is the threat we want to warn the beginning traders about. Below we will talk about the reasons why Forex volatile pairs can cause bad trading results.
People not dealing with financial markets don’t usually know about the notion of volatility so we will explain it at first. According to the books dedicated to technical analysis volatility is a level of price fluctuation within a given period of time. Simply put, this parameter reflects the width of the volatility range in which the price of a certain trading asset changes within a certain period of time.
In order to evaluate the prospects of working with a certain trading instrument people usually monitor the daily volatility indicator. The reason is that the vast number of the beginning traders tries to start their career with studying the market using the intraday trading. Thus, in order to earn money one needs to use high-volatile Forex pairs i.e. those pairs that can pass a big way within a day. In theory it allows accumulating a significant profit without the necessity of transferring the transaction over the night.
It is not very difficult to find an indicator of the instrument volatility within a period of a day, week, month or a certain time in the Internet. However, everybody knows that major Forex pairs have high volatility that is they change a lot within a day. So, we should underline it once more, in theory it gives a good opportunity to earn money.
Nevertheless, while choosing popular EUR/USD, USD/JPY and other currency pairs one should remember that working with them is very dangerous owing to the great number of speculative transactions conducted by the market makers. One can see it for oneself just looking at the character of price movement and type of the candles of EUR/USD pair on the hourly chart. It becomes completely evident that stable trends are rare and there is no smooth movement within a range. Moreover, candles have a large body and very long shadows, and often change colours. This indicates frequent controversial impulses. Sure, such conditions make good trading strategy nearly impossible as the price moves quite chaotically.
At the same time EUR/GBP cross-pair moves smoothly without any sharp thrusts. It often shows long trends that develop in accordance with their classic definition when new extremums appear in a successive order. Thus, the pair of the moving averages can earn quite good money even without applying any complicated trading schemes.
Besides, one can evaluate the threat the volatile pairs bring when important news are circulated. For example, after important macroeconomic data related to the USA are published the USD/JPY pair shows thorns - sharp movements with instant roll-back. If one looks at the response of another currency pair which is not so volatile, let’s say, XAU/USD (gold) one can note the development of the response without any sharp movements.
The reason is the same: large number of speculative transactions fulfilled by big players who just provoke traders to make mistakes. We even don’t tell about the favourite tactics applied by the market makers that is called “Hunting for stops”.
In this regard new comers are recommended to work with high volatile pairs when they have enough experience at the Forex market. Before they’d better work with such balanced instruments as EUR/GBP, GBP/CHF, GBP/JPY, EUR/JPY, AUD/JPY cross pairs and so on.
If one has a desire to work with equity or raw materials futures one should open the chart and study the price movements. If its volatility is too high don’t focus on it and tame another less stubborn instrument.
At the market the instrument volatility is not a constant value that is why a good trader controls everything related to his chosen assets. For example, when the EUR/USD pair appeared at the market it was not distinguished by very high volatility and its movement was not as nervous as it is now. Thus, Forex is not a place where one can find any stability. That is why one should be mentally flexible and constantly search for the better trading conditions.
Moreover one should remember that at the time when important news is released or other events take place volatility can dangerously increase. This fact is often neglected by the new comers for some reason. However such explosive moments can leave them without a deposit. So, if you understand nothing in fundamental analysis you should still find out more about the list of macroeconomic data that are to be published as well as monitor news. Otherwise you risk missing an important event that can cause a market fever and make the trading instruments unstable for the forecast.
Along with the choice of the broker, trading strategy and other important things you should pay special attention to trading assets and leave volatile Forex pairs alone until you get enough experience that will allow avoiding threats while trading with them. Just remember that the right choice of the asset is a recipe of the successful trading.