Forex volatility is declining, reducing the risk for investors. In the late 1990s, volatility was usually in the teens. It sometimes rose as high as 20% with U.S. dollar vs. yen trades. Today, volatility is below 10%. That includes historical volatility, or how much prices went up and down. It also includes implied volatility. That's how much future prices are expected to vary, as measured by futures options.
Basic Forex terms
Listed below are some of the key terms used in Forex and CFD/Share trading
PIP
A Pip is the "Percentage In Point" (PIP), sometimes also referred to as "Point". It is equal to the minimum price increase of a Forex trading rate. The most common Pip is 0.0001.
ASK PRICE
The ask price is the price you can buy a currency at. It is also the price at which the market is willing to sell the currency to you.
BID PRICE
The bid price is the price you can sell a currency at. The market is willing to pay you this price for this particular currency.
Why is volatility lower? First, inflation has been low and stable in most economies. Central banks have learned how to measure, anticipate, and adjust for inflation. Second, central bank policies are more transparent. That means they clearly signal what they intend to do. As a result, markets are less likely to overreact. Third, many countries have also built up large foreign exchange reserves. They hold them in either their central banks or sovereign wealth funds. These funds discourage the currency speculation that creates volatility.
Fourth, better technology allows for faster response on the part of forex traders. That leads to smoother currency adjustments. The more traders, the more trades, contributing to additional smoothing in the market.
SPREADS
Spread are the difference between bid price and ask price.
CURRENCY RATE
A currency rate against another currency rate.
Fifth, more countries are adopting flexible exchange rates, which allow for natural, and gradual, movements. Fixed exchange rates are more likely to let the pressure build up. When market forces finally overwhelm them, it causes huge swings in exchange rates. It'is especially true for emerging market currencies, making them more important global economic players. The "BRIC" countries, Brazil, Russia, India, and China, seemed impervious to the recession until recently. Forex traders became more involved in their currencies. However, in 2013, these countries started to falter, leading to an exodus and fast depreciation of their currencies.
