Fundamentals That Trigger High Volatility
Fundamentals That Trigger High Volatility
A stop-loss is a pre-set level at which you should exit an unsuccessful trade. The stop-loss level is typically determined when entering a position based on the risk you are taking in the trade. However, sometimes the market can be unpredictable and volatile. There are fundamental factors that can cause a rapid and unexpected price movement, which may trigger your stop-loss before you have a chance to react, leading to a larger loss than anticipated. In this post, we will look at six fundamental factors with high impact on volatility that can cause slippage, as well as significant news events that can cause a "gap" in price through your stop-loss level when trading with a prop account, and how to avoid or minimize this situation:
1. Interest Rate News
Interest rate news are announcements issued by central banks of various countries or regions, such as the Federal Reserve (Fed) in the USA, the European Central Bank (ECB) in the Eurozone, or the Bank of Japan (BOJ) in Japan. These announcements reflect the current and future monetary policy of central banks, which can affect the value of currencies by changing interest rates, money supply, or quantitative easing programs.
These announcements are usually scheduled in advance, and forex traders and analysts closely monitor them. However, sometimes central banks may surprise the market with unexpected or unconventional changes in policy, such as a sharp increase or decrease in interest rates or the introduction of new stimulus measures. These surprises can lead to a sudden and sharp market reaction.
2. FOMC Meetings
FOMC (Federal Open Market Committee) meetings are sessions of the Federal Reserve’s committee responsible for U.S. monetary policy. The FOMC consists of 12 members, including the Fed Chair, Vice Chair, and other senior Fed officials. This committee meets eight times a year to discuss economic conditions and U.S. monetary policy.
FOMC meetings can affect the value of the U.S. dollar and other currencies. Decisions made during these meetings can include raising or lowering interest rates, changing the money supply, or introducing other monetary policy tools like quantitative easing or forward guidance. These decisions can influence the exchange rate of the U.S. dollar against other currencies, as well as the prices of commodities and other dollar-denominated assets.
FOMC meetings are usually announced in advance, and press conferences follow (where the Fed Chair explains the reasons behind policy decisions and answers media questions). However, the FOMC can sometimes surprise the market with unexpected changes in monetary policy, such as announcing a new round of quantitative easing or signaling a change in interest rate expectations. These surprises can cause significant movements in the forex market as traders anticipate the Fed's possible response and the future direction of interest rates.
3. CPI Data (Consumer Price Index)
CPI data are indicators that measure the change in the price level of goods and services in a country or region over a specific period. The most common CPI indicators include the Consumer Price Index (CPI), Producer Price Index (PPI), and Personal Consumption Expenditures (PCE) index.
These data are crucial for forex trading as they reflect the purchasing power of a currency and inflationary pressures on the economy. High inflation can decrease the value of a currency and lead central banks to raise interest rates to curb inflation. Low inflation may signal weak demand and a stagnating economy, prompting central banks to lower interest rates to support growth.
CPI data are typically released monthly or quarterly and are often compared to the previous period and market expectations. If the CPI data significantly deviates from expectations, it can cause a substantial move in the forex market as traders predict a potential central bank response and future interest rate direction.
4. Employment Data
Employment data are indicators that measure labor market conditions in a country or region, such as the unemployment rate, non-farm payroll numbers, average hourly earnings, and labor force participation rate.
This data is also very important for trading with a prop account because it reflects the economic activity and consumer confidence in a country or region. Strong employment data can indicate a strong economy and high demand for goods and services, which may increase the value of the currency and inflation expectations. Weak employment data can signal a weak economy and low demand, leading to a decrease in the currency value and inflation expectations.
Employment data are typically released monthly and are often compared to previous periods and market expectations. If the employment data significantly deviates from expectations, it can cause a large move in the forex market as traders anticipate a central bank response and future interest rate direction.
5. Trade Data
Trade data are indicators that measure the trade balance between a country or region and its trading partners, such as the trade balance, exports, and imports.
This data is important for trading with a prop account because it reflects supply and demand for a currency and the external competitiveness of a country or region. A positive trade balance (or trade surplus) means that the country or region exports more than it imports, which can increase demand for its currency and improve the current account. A negative trade balance (or trade deficit) means that the country or region imports more than it exports, which can reduce demand for its currency and worsen the current account.
These data are typically released monthly and are often compared to the previous period and market expectations. If the trade data significantly deviates from expectations, it can cause a large move in the forex market as traders anticipate a central bank response and future interest rate direction.
6. Geopolitical Events
Geopolitical events refer to political, economic, or military relations between different countries or regions, such as wars, conflicts, elections, referendums, sanctions, trade agreements, or diplomatic meetings.
These events can affect the stability and security of a country or region and its currency. Geopolitical events can also impact global risk sentiment and demand for safe-haven or riskier currencies.
Geopolitical events are typically unpredictable and can occur at any time. If these events are significant and unexpected, they can cause huge movements in the forex market as traders react to the news and uncertainty.
