Volatility is a measure of the scale of price fluctuations over time. Volatility tends to be high when prices change to a large extent within a short span of time. The reverse also holds when prices oscillate more or less close to a certain price level without deviating much from it over a long span of time.Discover a revolutionary new forex robot.
It is the periods of high volatility that let’s traders make pips and it is the volatile nature of the forex market that attracts the risk seekers in search of high returns. However, entering the market in periods of high volatility can be stressful for most of the traders as they don’t know whether the trade will go their way or not. Why not concentrate on the low volatility period instead of focusing on the high volatility market.
There is a tendency in the currency prices to alternate between periods of high volatility and low volatility in the forex market just like other financial markets. This recurrent pattern is due to the crowd psychology which is the force behind changes in the forex market. Forex market is just people trying to buy or sell currencies. It is the psychology of the crowd that rules the market in the end.
There are four main stages of a trend. These four stages are: 1) Nascent Trend, 2) Fully Charged Trend, 3) Aging Trend and 4) End of Trend. At each stage of the trend, there is a different crowd psychology behind it. These four stages are closely linked to the cycle of volatility in the market. Let’s discuss these stages of a trend in detail.
Nascent Trend: This is the first stage of the trend. In the beginning of the trend when the new trend just starts either upside or downside, most market players are still skeptical about the possible new trend direction during the nascent stage of the trend. Volatility is thus low as both bears and bulls tread carefully and are cautious. Nothing is clear at this stage of the trend. Market players are trying to confirm or deny the start of a new trend. So everyone is cautious.
Fully Charged Trend: This is the second stage of the trend and during this stage the trend becomes well established! The trend becomes fully charged as there is now evidence from fundamental data that supports the trend direction. The trend is in full progress and it is time for more action now. Traders who are caught on the opposite side of the market become exposed when the new information proves them wrong. They become desperate.
During this period a lot of changing positions will take place. This causes the currency prices to move more dramatically within that trend period. Traders who were initially on the wrong side of the market become new converts to the trend.
Traders become convinced of the direction of the trend and new information convinces most of the traders of the direction of the trend. Everyone wants to jump in the trend. More and more positions are established. Hence volatility tends to be high during this period. This brings prices to higher highs in an uptrend or lower lows in a down trend.
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