Volatility is defined as the variation of a price over a period of time. If you look at any chart you’ll see that volatility is present in most financial markets, forex included.
There are ways that traders can make use of this effect and indeed profit from it.
Day traders should understand that news of the day greatly affects both pricing and volume, and should be used when setting up daily strategies and when pulling the trigger – both in buying and selling.
The VIX, which measures implied volatilities in S&P 500 options contracts is often seen as a broad based predictor of the market’s risk appetite. Sometimes called the “fear gauge”, an increasing VIX indicates risk aversion and less demand for high yielding currencies.
A falling VIX means increasing demand for risky assets – generally this a forward indicator of “dollar weakness” (see long term VIX chart).
VIX has shown a bit of restraint lately as charts and volume suggest, but as this index has been pushed down into the low 20’s and even high teens, it is coiled and ready for a push upward. The VIX can push upwards of 10%-20% in one day, making it one of the best day trades out there if one knows how to trade the news.
Oil: As oil continues is slow march upward, the VIX can be used as a hold play for day traders and those with short to medium buy and hold strategies.
Selling options: Options can be another great play on volatility, especially on the sell side. Options are priced significantly higher when volatility increases. Selling options at a peak is therefore a way of shorting volatility.