Volatility Definition in Finance

Volatility Definition in finance and Forex market explained by professional forex trading experts the “ForexSQ” FX trading team.

What is Volatility

Round and Round We Go, Where We Stop Nobody Knows’

The rest of 2016 is chock-full of events that will be major catalysts for a change of capital flows, which could open up exciting trends for FX Trader to Trade.

Some Forex traders believe (and for short-term traders, it’s a fine belief) that there is only one real asset class, and that asset is volatility.

Volatility explains the variance of price whether the market is volatile in a sideways motion such as a range or directionally volatile such as a trend.

Overview: All four economies of the G4 plus China (again, and rightfully so) are on the radars of investors to see whether or not excess income for investing should be steered toward equity, debt, or cash. So far, the equity and risk-seeking option are under stress as traders are unsure about the following items that major economies are facing going into H2 2016.

EU Referendum

While we have covered the potential outcomes for a Brexit, which has been deemed by bookmakers and intelligence bureaus is deemed a rare outcome, but one that must be respected. However, the potential negative impact is correctly considered too significant to ignore.

US Presidential Election

Two seemingly unpopular candidates and one unlikely person appear to be heading for the top ticket to the Oval Office in the United States in November. The US Presidential Election aligns interestingly with the EU Referendum that has a divorce from the EU as a real possibility.

What’s the Alignment?

Both the United Kingdom and the United States post the worst (largest deficit) trade balances of the G4. Trade Balance is derived from a nation’s exports, which bring income into the country – imports that cost money. The result increases the nation’s ability to save and be less reliant on others to buy a country’s debt to help finance governmental agendas.

Fed & BoJ: Will They or Won’t They?

The Fed & BoJ appear to be set to diverge monetary policy paths once again; that has the market watching for potential JPY weakness or USD strength. However, a failure for either the BoJ to ease or Fed to strengthen as the market expects them too could lead to an unbalanced strengthening in the JPY and likely weakening of the US Dollar.

As of Mid-May, the Market is only pricing in the one-rate hike from the current Fed rate of 0.37%. Pricing-in is consensually seen as a greater than 50% probability of a rate hike at any of the upcoming meetings through February 2017. Coincidentally, there is no expectation for multiple hikes

Is China A Cause For Concern Again?

The market value of the CNY is coming back to the discussion of trading desks on Wall Street. After the CFETS RMB index has now fallen 6% since it was published six months ago, meaning that the PBoC is managing a 12% annualized FX depreciation, even as the 12-month rolling trade balance is hitting new highs. What’s surprising to some is that the equity market fervor that swept the nation a year ago in China has shifted to commodities. While volatility has also increased, a bid in commodities like Iron Ore helps to show that optimism remains high as does faith in the Chinese Policy Markers.

Unlike 2015, China could be a source of calmness in H2 2016.

How Would ECB React Post-Brexit?

The shadow effect of the EU Referendum is that the collective economic union is coming under increased scrutiny. As we’ve discussed earlier, we’re heading from various Prime Minister’s of Euro-zone countries have asked for a renegotiation of their rights under the European Economic Union.

While the ECB was the most recent to announce significant easing in March, they are expected to provide the least amount of accommodation alongside the Federal Reserve, which the market is deciding how serious to take their projections for interest rate hikes.

The Bank of Japan has communicated to the market that the 12% appreciation of the JPY in 2016 has been watched by the BoJ, and further BoJ could cause them to act to limit or prevent undue strength.

Similar to the BoJ, the Bank of England may be forced to cut rates or provide unexpected support should a Brexit be the outcome of the EU referendum on June 23. Therefore, while significant GBP strength could be the outcome if a ‘Vote Remain’ wins out, and the global economy stabilizes, it’s too risky to exclude the scenario of an overtly dovish Mark Carney on a ‘Brexit’ outcome.

Trade Possibilities?

Swing Trading is often defined as multi-day to multi-week trades. Personally, it is my preferred method of trading even though catching a trend early and getting out when in hindsight you should have stayed in is painful. Either way, Swing trading goes for ~250-500+ pips while using a 75-125 pip loss against strong support or resistance.

Given the significant event, risk coming up, this type of trading that limits risk can help to take advantage of strong/ weak relationships or opening range breakouts, which can be favorable approaches in volatile markets.