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It looks like the forex market jolted back to life last month, as volatility surged and trends were sustained. You see, volatility is often considered the lifeblood of the forex industry, as larger price swings tend to attract more trading activity and volumes.

Industry experts have noted that several forex hedge funds have picked up on this and increased their positions to take advantage of the large market moves recently. JPMorgan reported that its global index of volatility has climbed from the July lows of 5% to 7.5% in September, encouraging increased participation in the financial markets. Stephen Jen, head of the hedge fund SLJMacro, noted that currencies are responding more to economic data once again. “It is the first time this year that things make sense,” he quipped.

As I’ve mentioned in my blog entry on trading volatility at the start of September, clearer monetary policy biases among major central banks sparked strong forex market trends, as lines were drawn between the dovish and hawkish camp.

On one hand, the U.S. dollar and the British pound enjoyed bullish momentum, with the Fed and the BOE moving closer to tightening monetary policy. On the other hand, the euro and the Japanese yen lost a lot of ground recently, with the ECB implementing aggressive stimulus measures and the BOJ slowly starting to admit that the Japanese economy is in a rut. Commodity currencies also suffered, as trade and inflation figures became a concern. Forex market intervention has also popped up as a major market theme, weighing mostly on the New Zealand dollar and the Swiss franc.

forex trading volatility

With these themes likely to stay in place for the next few months, it’s highly likely that the current trends will carry on and spark stronger forex moves. Just recently, a leading research broker Investment Technology Group (ITG) launched its ITG FX Volatility Index, which forecasts forex market volatility for the next trading day, allowing traders to make adjustments beforehand.

In volatile trading conditions, forex traders like you and I need to be more mindful of slippage, which could lead to a difference in the prices in which trades are executed. If this isn’t something that you’re comfortable with or if your trading strategy isn’t designed to accommodate this, then could consider sitting on the sidelines during news releases or session overlaps.

Adjustments in stop losses and profits targets should also be considered, along with time frames for keeping trades open. As you’ve probably noticed in the past few weeks, currency pairs tend to move in one direction for much longer periods these days, which means that multi-hundred pip profit targets ain’t too ambitious. However, retracements also tend to be huge, which suggests that wider stops could be used to give the trade more leeway in case corrections take place.

Any other adjustments you think should be made to incorporate the pickup in volatility? Don’t be shy to share your tips in our comments section!