The Problem
Most forex Traders can spot long term trends but they cant profit from them because they get stopped out by volatile counter moves which clip their stop and give them a loss – then they see the currency go the way they thought and pile up huge gains.
If you want to win at forex trading then you need to deal with volatility. Let’s look at standard deviation and what is and how we can use it to help us deal with volatility.
Standard deviation is a statistical term that refers to and shows the volatility of price in any currency or financial instrument. Standard deviation measures how widely values are dispersed from the mean or average.
Dispersion is defined as the difference between the actual closing value price and the average value, or mean closing price.
The larger the difference between the closing prices from the average price, the higher the standard deviation and volatility will be. On the other hand, the closer the closing prices are to the average mean price, the lower the standard deviation, or volatility of the currency is.
Technical Calculation
Standard deviation the square root of the variance, and the average of the squared deviations from the mean.
High Standard Deviation is present when the price of the currency studied is changing volatile and has large daily ranges in reverse low Standard Deviation values take place in periods of consolidation i.e. when prices are more stable and range bound.
Keep This in Mind
Prices spike away from the average as the participants react to the emotions of greed and fear and then return to the average mean, when prices have moved to far to quickly.
A great tool for helping you understand standard deviation and picking areas to enter your trades with good risk / reward is the Bollinger Band.
Dealing With Volatility.
Key points to keep in mind are:
That strong trending moves will break back to the mid Bollinger band and this provides you with an area to target to get in on the trend. When the bands expand and volatility is high, prices will normally recoil back and you can take a contrary trade in the opposite direction, as prices return back to the mean.
Consider this equation:
Fundamentals (Long term average mean) + Investor perception (High volatility to Inner and outer bands) = price.
The price of anything tends to dip back to the mean or average - but investors will spike prices to far up or down along the way. This is a simplified version but its obvious how to trade this equation, as we have suggested above.
Always keep in mind that huge price spikes don’t last and the average in a strong trend is a value area.
Target these areas and use your technical tools on your forex charts to define entry.
Using Standard Deviation for Greater Profits
Standard deviation tells you how volatile prices are and a Bollinger band reflects this – it is not however on its own a signal to trade. By understanding volatility and how it occurs through standard deviation you will be able deal with volatility better and pick low risk / high reward exit and entry points.
If you don’t understand standard deviation and its impact day to day you won’t make money trading currencies so make it an essential part of your forex education. If you do it will help you on the road to currency trading success.
ity as a hobby you’ll ultimately lose all investments there. If you treat it as a business you still may loose everything.The correct approach is: consider each pressing of the Buy/Sell button as entering a battlefield. If you enter it without having a knowledge, skill and experience on how to win, you are destined to fail. You may have some lucky trades in the beginning, though. That, by the way, is the worst case scenario for the rookie in trading.
The earlier you get your “bad” lessons, the better for your overall experience. No mater how good you consider yourself prepared, after demo trading lessons, you have no idea of the forces ruling on the real market.
In fact the worst enemy you are going to face in the very beginning is not hiding behind the walls of the global currency trading centers. Your most dangerous foe is hiding deep inside of you. That enemy is so powerful that you will be amazed how quickly it will wash away all your carefully considered decision.
No one has been able to evade the force of that destructive power. No one can understand or realize that force unless it has been confronted face to face. Start trading with real money and you will face it too. Fear, Greed or Hope are some of the names of that power.
Fear forces you to sell near the bottom and buy near the top. Greed forces you to get out of the market prematurely. Hope will keep in the trade until you loose everything. Fear may save you but hope may wreck you completely. Greed will never make you rich.
It is easy to give advice to trade without emotions and use the logic, only. How you can achieve that if you never have been there. You need to go through that turmoil, pick up your loses due to your emotional decisions and than analyze.
Study all your “bad” trades, because they are the most precious gifts on the way to proficiency in trading. Growing as an experienced trader is possible only after getting your losses in the beginning. Then sit down and carefully study the lessons they brought to you.
One thing traders never want to do is to admit of being wrong. The market is a constantly changing and it demands flexibility in taking decision. That implies monitoring and constantly adjusting, changing your decision and action. When your logical analyzes suggest that you are wrong – get out, quickly.
Once you overcome the emotions, concentrate on developing your signature way of trading. You can start with following different advisors and system and picking from them the things you like. Demo trade and test your ideas until you find the trade system which is matching completely your personality.
Now, you have to go back to emotion in a controlled way. Every time your system suggests a trade look inside you and see how you feel about this trade. You feel bad – discard it. If you feel good – keep it.
Here comes the final step: Looking for the final approval sign before submitting the trade. Here is the time, where the mastership shows up. Your weapon is loaded, the target is clearly seen on the visor and the finger is on the trigger. You have to make that final exhale, get the target over the cross point and shoot it.
How much knowledge, skill, experience and patience you need to build within in order to reach that very final stage of trading proficiency? Only you’ll know that and only you can do it. The rest is just numbers in your bank account.
Building a fortune by trading currency is not a mirage in the desert of live. There are hundreds of traders who are making living of that business and you can do it too. Study all you can find on the net and follow the steps of the best if you want to win that battle.
