By Sean Hyman, Currency Analyst
www.worldcurrencywatch.com

Traders ask me this question all the time. And I can’t blame them. After all, if you can’t identify large moves in the Forex market, you can’t possibly know if you’re earning the kind of profits you want.

So let’s clear this up right now, shall we?

First to understand the answer, you need to know that the Forex market does NOT move in points or ticks like other markets. Instead, the Forex market moves in pips – the smallest movements that currency pairs can make.

When you look at a trading screen, most Forex pairs are priced four places beyond the decimal point (the Japanese yen is the only exception). So if a currency pair moves 0.0001, then it moves one pip.

Now to find out what constitutes a big pip move, you need to look at how many pips a particular currency pair trades in a day. For instance, the Aussie dollar trades about 174 pips a day versus the U.S. dollar (AUD/USD). But more volatile pairs like the British pound/Japanese yen pair (GBP/JPY) trades around 352 pips a day on average.

Major difference. You can clearly see it below...

Some analysts will tell you that a 200 pip move is a big move for any pair. I beg to differ. If you’re trading a volatile pair like the GBP/JPY, then a 200-pip move is pretty average – in fact, it’s less than it typically trades in a day.

However, if a relatively non-volatile pair like AUD/USD shoots up 200 pips in a day, then you’ve got a huge mover on your hands.

Cross-Rates Zip Around in Price Much Faster

Actually, the GBP/JPY pair isn’t even the most volatile pair in the bunch. Other cross-rates (non-dollar currency pairs) have humongous swings in price on a daily basis.

Some of the biggest movers and shakers include the EUR/NZD (euro/New Zealand dollar) and the GBP/AUD (pound/Aussie dollar). Both of these pairs have daily swings of 525-565 pips PER DAY on average. There are some pairs that may not make it that distance from low to high for the ENTIRE WEEK.

Those extremely volatile pairs can move 100 pips as easily as some pairs can move 20 pips. In the end, it’s all relative. The point is you need to know what’s an ordinary move for any pair you’re trading. Then you can gauge how your pair is performing on a daily basis.

For instance, if a pair normally moves 200 pips but today it moved 400 pips (and that does happen…) then you might want to close your trade altogether and take your profits.

Or you might decide to close out part of your trade, take partial profits, and move your stop-loss up so you’re prepared just in case the currency pair swings violently in the other direction.

Therefore, know the typical trading ranges for any currency pair you’re buying or selling.

Note: It’s good to check the volatility on each pair at least once a month because volatility levels can change drastically. As the volatility changes, your stops, number of lots and your EXPECTATIONS will all need to change accordingly.

Regards,
Sean Hyman