Forex trading is the act of buying and selling currencies on the foreign exchange market. The foreign exchange market is a global decentralized market for trading between different currencies. Whether you are a business owner looking to buy foreign currency for your company, or an investor looking to speculate on currency movements, forex trading can be a risky and rewarding endeavor.
One of the key concepts in forex trading is deviation. Deviation occurs when the price of a currency pair moves away from the average price level. This can happen for various reasons, including economic news announcements, central bank intervention, or market sentiment. In this article, we’ll take a closer look at what deviation is and how you can utilize it in your forex trading.
What does deviation mean in Forex trading?
In Forex trading, deviation refers to the difference between the current price of a currency pair and its average price. This difference can be measured in pips, which is the smallest unit of price movement in the foreign exchange market.
A currency pair is said to have deviated when its price moves away from its average price level. This can happen for various reasons, including economic news announcements, central bank intervention, or market sentiment. When a currency pair deviation occurs, it can create opportunities for traders to buy or sell the currency at a more favorable price.
What Causes Deviation?
There are a number of reasons why the price of a currency pair may deviate from the average price level. Some of the most common reasons include;
Economic news announcements
Major economic news announcements can have a significant impact on currency prices. For example, if a country’s central bank raises interest rates, this will usually cause the country’s currency to appreciate against other currencies.
Central bank intervention
Central banks often intervene in the foreign exchange market to buy or sell their currency in order to achieve a certain economic goal. For example, if a central bank wants to weaken its currency in order to stimulate exports, it will likely sell its currency in the market. This selling pressure can cause the currency’s price to deviate from the average price level.
Market sentiment
Market sentiment is a measure of how investors feel about a particular market or asset. Positive sentiment usually leads to increased buying pressure and higher prices, while negative sentiment usually leads to increased selling pressure and lower prices. Therefore, changes in market sentiment can also cause deviations in currency prices.
How to Utilize Deviations in Forex Trading
Standard deviation measures the range of price movement around the average price. In general, the larger the standard deviation, the greater the risk. However, the standard deviation can also be used as a tool to identify potential trading opportunities.
For example, if a currency pair has been trading in a tight range for an extended period of time, a large deviation could signal a breakout from the range. Similarly, if a currency pair has been trending higher, a small deviation could signal a potential reversal.
Of course, it’s important to remember that no single technical indicator is 100% accurate. Deviations should be used in conjunction with other technical indicators and market analysis to generate the most accurate trading signals.
Factors to Look Out For While Trading Deviations
When trading deviations, there are a few things to keep in mind:
1. Look for large deviations on high-liquidity currency pairs.
Large deviations can occur on any currency pair, but they’re more likely to occur on the more liquid pairs. This is because there’s typically more trading activity and market liquidity on these pairs, which means they’re more likely to move in response to news announcements or changes in market sentiment.
2. Be patient and wait for the deviation to play out.
Many times, a large deviation will be followed by a period of consolidation before the currency pair continues in the direction of the deviation. Therefore, it’s important to be patient and wait for the market to confirm your signal before entering a trade.
3. Use risk management techniques.
Deviations can often lead to sharp and sudden price movements, which can be difficult to predict. Therefore, it’s important to use risk management techniques such as stop-loss orders to protect your profits and limit your losses.
What is the best deviation in forex?
There is no single answer to this question, as the best deviation will depend on your trading strategy and goals. However, as a general rule, you should look for large deviations in high-liquidity currency pairs. These pairs are more likely to move in response to news announcements or changes in market sentiment, which can provide opportunities for profitable trades.
Can Deviations be used with other Indicators?
Yes, deviations can be used in conjunction with other technical indicators like Bollinger bands. However, it’s important to note that standard deviations can also be used as components of other indicators like the Relative Strength Index (RSI). When using deviations with other indicators, be sure to back-test your trading strategy on historical data to ensure it is generating accurate signals.
Check Out Decode Global to Know More About Forex Deviations
Deviations can be used to predict price movements with a significant degree of accuracy. Check out Decode Global to know more about how deviations work in forex trading by trading using demo and live accounts available on our platform.