Over recent years, unpredictable political and social events have given way to high levels of volatility in the foreign exchange (FX) market. From Brexit to the coronavirus pandemic, the past four years alone have seen strong and frequent market reactions.
For instance, 2016 was fraught with political disruption, with both Brexit and Donald Trump’s election upending expectations and prompting wild market movements – an opportunity for traders with the know-how to profit from such events. In the years since,
protectionism and trade wars have continued the trend, and of course, most recently, the COVID-19 pandemic has destabilised currencies internationally.
In particular, the GBP/USD market has seen highs and lows which, for the savvy trader, have yielded significant profits. Yet volatility at these levels also increases the scope for loss. Ensuring trades land on the right side of the two can be a difficult
exercise – not least given the speed and regularity at which major currency pairs fluctuate.
Profiting from volatility
If we look at recent events that have affected the UK and US markets, there has been ample opportunity to capitalise on volatility. In December 2019, Boris Johnson achieved a majority in the House of Commons following the general election, which saw the
GBP/USD rate reach highs of 1.3114. Yet this quickly dropped just 11 days later hitting 1.2904 on the 23rd December following updates on the Brexit transition period. Fast-forward a few months and the period of volatility was far from over. Indeed, following
the introduction of severe measures to contain the coronavirus outbreak, the 10th March saw the largest intraday fall in the FTSE 100 since the financial crisis – plummeting by over 8%. In turn, GBP/USD reached a 35-year low of 1.1410 on the 19th of the same
month when the Bank of England cut rates to 0.25% in response.
To put the above into a trading context, someone purchasing GBP/USD at the high point surrounding Boris Johnson’s election would have stood to make a double-digit loss had they then panic-sold their assets around the time of the Bank of England announcement.
Had they sold and bought on the same dates, this would have translated into up to 13% in profit. Spurred on by the ongoing pandemic, this climate of volatility is still in place, and there will undoubtedly be further opportunities to profit in this space.
But making sure risk is managed is vital.
So, what can traders do to protect their assets? Although not yet widely available on the retail market, risk management tools are slowly becoming more prevalent, and can provide an added layer of security for those looking to trade in riskier climates –
or indeed those that are new to the game and not ready to trade unsupported. With various options available, some go as far as to provide total protection against loss for a defined period, meaning if the market moves in the wrong direction, traders recoup
their losses on the trade (minus the cost of taking out protection).
Technology continues to evolve and upgrade in the forex trading space and with access to the right tools, traders can have the confidence to make the most of opportunities in the market without overcommitting and jeopardising their assets.