What is Forex Volatility and how is it determined?

What is Forex Volatility and how is it determined?
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Volatility is a measure of price volatility over a certain period of time. The larger it is, the stronger the volatility - the greater the distance in points the trading pair travels in a short period of time.

At the moment, the most volatile instrument is considered to be cryptocurrency, and also the most risky and dangerous. Also, oil and gold can be attributed to highly volatile instruments.

How is volatility determined?

There are 2 types of volatility:

  • historical;
  • expected.

The historical indicator displays the standard deviation of the value of an asset over a certain period of time. It can be determined manually based on the historical data of price chart changes.

To do this, the distance from the minimum to the maximum value of the candle on the price chart is measured. Measurements are made on the last 10 candles, added up and divided by 10.

There are free services on the Internet that help calculate the volatility of an asset. The most popular are Metaf.net and Myfxbook.com.

You can also use special indicators that determine the degree of volatility of a particular currency pair. For example: AverageTrueRange (ATR) or CCFp.

How to use volatility in trading?

When trading binary options, a trader should pay great attention to the level of volatility of the instruments with which he works.

Increased volatility means that the market is now at the stage of maximum activity, so you can work on it both up and down. If there is a decrease in volatility, this indicates that it is best to monitor the state of the general trend and work on it.

What are the consequences of high volatility?

A sharp rise in volatility always carries a number of consequences. Often they will be negative, and not only for any one instrument, but for the entire market as a whole. For example, if there was a sharp jump in any market area, and then a sharp decline, this could affect all international trade. It must be remembered that in the economy everything is interconnected.

When does volatility increase most often?

Any asset also has certain periods of time in which its activity increases to the maximum. It depends on the time of activity of traders of the currency that is in the currency pair as the "base".

For example, in a couple EURUSD the euro is considered the base one (and the dollar is the quoted one), so this tandem will be active during the European trading session, when the London Mercantile Exchange opens. And the peak of the greatest activity will be in the first half for, until the moment when the traders of the London Stock Exchange leave for lunch.

Should I pay attention to the volatility of the pair?

If we consider stocks of not very large companies, as well as various exotic currency pairs, like USDMXN and EURDDK, then the volatility of such assets will be extremely low, because they are traded by a small number of traders.

In the trading environment, one can often hear disputes that low volatility increases or, conversely, reduces risks. In reality, risk is fundamentally influenced by money management and trading strategy, but not the level of volatility.

Volatility needs to be known in order to calculate the most efficient time for trading!

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