Volatile Currency Pairs – A Bless or a Curse?
How binary options traders should approach high volatility currency pairs.
Volatility. This word is used as a curse by many traders. Some traders fear and cringe from it, others embrace it. How to trade it is one of the hottest debates in the trading some world. Some strategies avoid it and others make it their b#*ch. Volatility should be on the minds of Binary Options traders. This measure of a market’s movement is a great tool to take advantage of.
So, What Is Volatility and How Can I Measure It?
There are a few ways that the word volatility can be used in the investment world. Sometimes the saying “volatility has come back to the market” can mean that fear has crept back in and downward movement is expected. At other times this same statement could mean that the market has begun to get active or that the average daily range has increased. In each case the use of volatility is correct but what does it mean to Binary Options traders?
The Wikipedia definition of volatility is “a measure of variation of the price of a financial instrument over time.” This sums it up well. Volatility is the measure of a financial instrument’s movement, or how much it moves on average, over time. This measure does not take into account direction, simply that the asset moved. Assets or currency pairs with higher volatility move more. Assets with lower volatility move less. In my opinion since Binary Options are about price movement higher volatility seems like the way to go.
Here are some ways to measure volatility:
- Bollinger Bands©, probably the best tool in this category (Check out Bollinger Bands for Binary Options Review)
- Elder Rays
- Average True Range
- Chaikin Volatility
Should Binary Traders Fear Volatility?
Many traders fear volatility because the same price swings that produce profits can also produce huge losses. Volatile assets and currency pairs have a greater chance of being stopped out and/or creating losses in margin accounts. Except in Binary Options there is no fear of that. Binary Options do not have stops and are not influenced by random day to day moves the same way as forex, futures and equity options. Since Binary Options cannot be stopped out or create a loss larger than the original trade there is no reason to fear temporary price changes so long as the asset closes in the money. However, there is also another reason to fear volatility. Volatile assets and currency pairs can also produce whipsaws and false signals on your charts. Filtering out these signals takes some practice, but it can be done.
Why Volatility Is Good For Binary Options?
I have one word to sum up why volatility is good for Binary Options. Movement. Volatility is a measure of movement. Binary Options are traded on movement. Assets and currency pairs with higher volatility have a higher probability of moving, and moving significantly, than assets with lower volatility. This is good for Binary Options traders for two reasons. First, you want the asset to move. It needs to be above or below your strike price for you to profit. There is nothing worse than buying a position and then watching the asset trend sideways for the next half day to a week and then closing barely out of the money. Even if a volatile stock moves sideways the range will be much larger. The second reason is the amount of movement. Volatile assets move more than less volatile assets. That is, they move further into the money. Even though the payout structure of Binary Options is pretty simple and my broker uses real time data I like to be sure that my trades will finish deep in the money. Higher volatility assets will move further into the money than a less volatile one.
What Are The Best Ways To Trade Volatile Currency Pairs?
I think the same techniques I use on less volatile assets work just as well on more volatile ones. The difference is that trading a volatile asset is more active and the signals are more exaggerated than with less volatile pairs and assets. Trend following techniques work very well once break outs and trends are established. Stochastic, MACD, Time Series Forecast and RSI are all great trend following techniques (Find more info on our Binary Options School). Other techniques that work well for volatile pairs are support/resistance bounces and Fibonacci retracements. Both of these techniques produce excellent areas for volatile assets to change direction and binary traders to profit. Volatile currency pairs are also good choices for traders who can tolerate the risk of option scalping techniques and 60 second options.
My Last Word on Volatile Currency Pairs and Binary Options
Volatile and high volatility currency pairs are a good thing. These pairs make large movements with exaggerated swings. These swings are easy to track with technical indicators and produce trades with a higher probability of closing in the money. Volatile pairs are also more active and provide better opportunities for short traders like Binary Options aficionados. I tend to hunt for pairs that are making these exaggerated movements because I have learned through experience that I have a better chance of closing in the money.
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