Volatility is one of the most important characteristics of the Forex market, and although it can play against us, it can also be our best ally. For this reason, today we review how we can take advantage of this factor.
What is volatility in Forex?
Usually, we can define volatility as the speed in which prices move, whether it is an asset, raw material, index, currency, etc.
This concept is directly linked to market liquidity, which refers to the volume of transactions.
The more liquid a market is, the less volatility there is. If you have less liquidity, the exact opposite occurs.
Forex is the largest market in the world, with a daily volume that exceeds 6 trillion dollars. For this reason, it is not very volatile, if we talk about how difficult it is to see a significant percentage change in a currency.
However, currencies do tend to show drastic and sudden changes, as a result of their close relationships with geopolitical events,
Observing a variation of 2-4% in a currency such as the euro, which is one of the strongest, takes several weeks, and even months in a normal situation.
Making money from these variations would be a difficult task if we do not have enough capital, and a broker is not used.
Besides that it is rare that so much percentage moves. Imagine you have just $ 500 in capital. If you spend it all on buying euros, expecting this currency to increase by 4%, then by the time this happens, and you manage to exchange it again for dollars, you will have earned just $ 20.
Fortunately for traders, this is not the case when you use a broker that offers leverage. And what is this? Let’s see it below:
Take advantage of currency fluctuations using leverage
The rapprochement caused by the Internet between people and investments is really surprising.
Until recently, and even to the belief of some people, financial markets were only within the reach of a few.
Today, this thought cannot be further from reality.
Hundreds of brokers offer us a variety of instruments to take advantage of the fluctuations of different assets, currencies, cryptocurrencies, stocks, raw materials, etc., from the comfort of our home.
And best of all, they offer us the option of increasing our purchasing power with immediate credit, better known as leverage.
With this tool, we can open positions in the market several times larger than our capital, in some cases hundreds of times.
Example to understand leverage
A broker that offers you a maximum leverage of 1: 100 or 100x, means that it multiplies your buying capacity by 100 times.
Thus, an initial deposit of as little as $ 100 can open positions of up to $ 10,000. Surprising, isn’t it?
Of course, since not everything is pink, this can be a double-edged sword, so it must be used with great caution, learning to use it preferably with a demo account.
With leverage, you can earn more than your initial capital in a single operation, but you probably also have to put everything at risk.
To avoid this, trading platforms allow you to place stops for loss, with which you can control the risk. Generally, it is not recommended to risk more than 3% per trade.
The most important thing about this tool is that you will be able to take advantage of the movements of the Forex currencies, even when their volatility is low.
Using the same example that I placed in the middle of this post, with a capital of $ 500, you could get the same $ 20, risking just a small fraction of your deposit, which could be $ 5 – $ 10 – $ 20 of risk, this will depend on where you have placed taking losses.
If you are interested in learning about profit and loss, better known as take profit and stop loss, stay tuned for our publications in the Forex Market section.