Why is the Forex Market So Volatile and How Can You Exploit it For Profit

One of the things that is intriguing about the Forex market is the volatility. Traders may wonder what moves the markets on most days and how much do retail traders move the markets? The answer to this question can be viewed from the perspective of the amount of money that changes hands every day.

Currently that amount of money is $3.2 trillion as of 2007. The new report is due this year 2010 and one would expect that it would be much larger. This amount of money dwarfs the equity markets and is the largest financial market in the world. More and more traders come into it each day. Of course there are many who leave as well with tails between their legs. What happens each day that moves the market?

Here is a perspective that you may not have considered and could play into your future trading. I learned it from Richard Olsen and the OlsenScale.

First let's look at what volume of money is in the market; as we said $3.2 trillion. What if we begin to break that down assuming that the flow of money through the day is the same? Any thinking person would realize that this is not the case but so that we have a foundational point we will assume for the moment it is. The $3.2 trillion breaks down to $2.2 billion per minute. This is a substantial amount and it would require deep pockets to move the market at this level.

How does that breakdown per second? We find it to be about $37 million. That is a number most of us can comprehend. Now if we take it one step further and break that down to the 10 major currency pairs and the percentage traded by each pair on average, the amount to move a currency is surprisingly small.

For the EURUSD it is only $11 million and that is the largest of the 10 currency pairs. The smallest at the time of this article was the EURCHF which was $1.6 million. When you consider this you can see why traders at the retail level have influence in the market.

How then could a trader find an edge with this knowledge?

Here is one method that can be employed. Follow the trending momentum of reversal signals found on RSI (Relative Strength Index) for the trading period for the New York time zone. If, for example, the signals are Positive Reversals and Negative Divergences and the RSI level supports the price moving up then you can expect that at the end of the day these day traders will begin to take profits. A short trade would mean profits simply by knowing how to read RSI and knowing how market size can easily affect prices at the retail level.