Volatility
What is volatility?
Volatility - instability of market conditions, demand, prices, which often occurs due to insufficient liquidityThat is, the inability of assets to sell quickly at close to the market price.
Volatility is considered the most important financial indicator, because it allows you to calculate financial risks (the probability of risk when using a financial instrument in a certain time period). The annual average volatility is most often used for this purpose.
What does volatility on the currency market mean?
In the foreign exchange market, volatility refers to the maximum and minimum price change over a certain period of time. The greater the distance between the maximum and minimum prices for the allocated period of time, the stronger the volatility. The shorter the distance, the weaker the volatility.
Volatility on e can be measured both in points and as a percentage of the initial value of the value.
Important: It should be clarified that the concept of volatility is not just the difference between extremes. The reference point of volatility is not the price value itself, but its trend. That is, volatility is more correctly understood as the value of the deviation from the existing trend. If the trend shows high growth and currency fluctuations occur within the price channel of the trend, such an instrument cannot be called volatile.
What types of volatility are there?
It is customary to distinguish between two types of volatility:
- Historical
It is a measure of the standard deviation of the instrument's value over a certain period, which is determined on the basis of historical data on price changes.
- Expected
Deviations calculated on the basis of the current value of the instrument with the assumption that its market value reflects possible risks.
What does high and low currency volatility mean?
There are no standard values to determine the strength of volatility, but many traders use the following values:
- Low volatility
If in one trading week the currency rate changed by 2-3% (up or down), as opposed to the closing price of the previous trading week;
- High volatility
If in one trading week the currency rate changed in the 15% range as opposed to the closing price of the previous trading week.
What are the peculiarities of volatility?
The volatility of currency pairs has the following features:
- Volatility is subject to cyclicality. That is, it is constantly increasing, first reaching a maximum, then weakening to a minimum;
- Volatility is constant. Not just in the sense that it constantly increases and decreases, but in the sense that it repeats itself. Based on this, we can assume that if price moves in this range today, it will continue to move in the same range tomorrow;
- Volatility tends to the average value. After volatility reaches the maximum or minimum point of the market, it invariably returns to its average value and stays there for some time. That is, if the minimum is 1% and the maximum is 4%, then most of the time the average price volatility is 2%. Knowing this feature, you can easily calculate entry or exit points from the market.
How to use volatility when trading on ?
Volatility is crucial when assessing risks in trading. It entails the need to change the trading lot and adjust the leverage in margin trading.
Based on historical volatility data and predicting expected volatility, several practical rules can be developed that will greatly enhance the effectiveness of a trading strategy:
- The choice of a currency pair for trading should be made depending on the current trading session, the time of day and the predicted volatility of the currency for that period of time;
- You can not focus on volatility as an indicator of the strength and direction of the trend;
- The volatility of a currency pair can consist not only of a long-term purposeful movement in a certain direction. Volatility can also consist of movement within small limits.
Knowledge of the volatility of currencies in certain trading sessions can have a great influence on the quality of trading:
- European session - volatile European currencies: GBP/JPY, USD/CHF, GBP/USD and GBP/CHF;
- American session - GBP/CHF, GBP/JPY, USD/CHF;
- Pacific session - the most volatile pairs, which includes the Japanese yen - GBP/JPY, USD/JPY, EUR/JPY and cross rate GBP/CHF.
The higher the volatility, the more opportunities to make money, but very high volatility also increases trading risks.
Download volatility indicators