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Home » News » Currencies » Mind the gap: coping with forex volatility

Not all markets are created equal: some are simply more volatile than others. Using a stop loss order is a good first step in effective risk management, but it can work against you. Keeping stops too close to the current price can leave you stopped out of a position if a sudden market gyration occurs.

Forex markets are particularly volatile, but because of the huge volume of market participants, sudden swings are less likely. That is not to say they NEVER happen: in January 2015 the Swiss central bank abandoned a long standing cap against the Euro (EUR), causing the Swiss franc (CHF) to soar against the single currency. It was totally unexpected and led to a blood bath among many seasoned currency traders. It saw a 30% move which is a rare event in currency markets.

Traders need to be able to assess just how volatile a market is on a particular day. How frequently does the price swing back and forth?

FX markets can be great for long term trends and technical analysis, but short term FX traders can see some big changes. Traders looking for small profits need to be particularly aware of volatility: if your stops are close to an FX pair, you could be seeing multiple positions stopped out in a given day. Factor in the spread and this can prove costly if many of your trades are not able to survive for very long. It means you are staying too close to the market, holding on too tight, and paying for the privilege.

Many brokers provide a trading off the charts facility, which can help you to visualise where your stops sit in relation to the market. Bear in mind that each market will be different: some currency pairs will encourage you to keep your stops further out than others.

If you are placing large trades, also be aware that the broker can see where your stops are. If you are trading the broker’s price, and not the market’s price, be aware of this: some brokers have been known to tweak the price if it is very close to customer stops. It is another good reason to keep your stop loss orders wider of the price

Be aware that prices will also move when the market is closed – or when you are asleep. Some traders rely on robots / expert advisors to keep tabs on things for them during this time period, but overnight news can impact a price when a market is closed. I make it a point to check news from Asia in the morning, pretty much as soon as I wake up, and well before I have my coffee!

FX markets tend to stay open for most of the week. But they can move quickly if economic data is released overnight. Data from China and Japan in particular can emerge when you are asleep, although frequently this is scheduled, and you can allow for it.

Big positions can be tougher for the trader, as your broker is partly dependent on the liquidity in the underlying market. Again, in FX this is generally not an issue, as the market is very big and major pairs like USD/EUR or USD/JPY are not going to be affected by private trading flows.

This article is not investment advice. Investors should do their own research or consult a professional advisor.

Stuart Fieldhouse Editor

Stuart Fieldhouse

Stuart Fieldhouse has spent 25 years in journalism and marketing, including as a wealth management editor for the Financial Times group, covering capital markets and international private banking, and as an investment banking correspondent for Euromoney in Hong Kong. He was the founder editor of The Hedge Fund Journal.

Stuart has worked at CMC Markets, supporting the re-launch of its global financial spread betting and CFD trading platforms. He is also the author of two books on trading, published by Financial Times Pearson. Based in The Armchair Trader’s London office, Stuart continues to advise fund managers, private banks, family offices and other financial institutions.

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