Forex for a trader
Forex volatility

Forex volatilityHow to Measure Volatility. Volatility is something that we can use when looking for good breakout trade opportunities. Volatility measures the overall price fluctuations over a certain time and this information can be used to detect potential breakouts. There are a few indicators that can help you gauge a pair’s current volatility. Moving averages are probably the most common indicator used by forex traders and although it is a simple tool, it provides invaluable data. Simply put, moving averages measures the average movement of the market for an X amount of time, where X is whatever you want it to be. There are other types of moving averages such as exponential and weighted, but for the purpose of this lesson we won’t go too much in detail on them. For more information on moving averages or if you just need to refresh yourself on them, check out our lesson on moving averages. Bollinger bands are excellent tools for measuring volatility because that is exactly what it was designed to do. Bollinger bands are basically 2 lines that are plotted 2 standard deviations above and below a moving average for an X amount of time, where X is whatever you want it to be. One line would be plotted +2 standard deviations above it and the other line would be plotted -2 standard deviations below. When the bands c ontract , it tells us that volatility is LOW. When the bands widen , it tells us that volatility is HIGH. For a more thorough explanation, check out our Bollinger bands lesson. 3. Average True Range (ATR) Last on the list is the Average True Range , also known as ATR. The ATR is an excellent tool for measuring volatility because it tells us the average trading range of the market for X amount of time, where X is whatever you want it to be. So if you set ATR to 20 on a daily chart, it would show you the average trading range for the past 20 days.

When ATR is falling , it is an indication that volatility is decreasing. When ATR is rising, it is an indication that volatility has been on the rise. Currency Volatility Chart. See the currency pairs with the most significant price fluctuations. The following graphs provide a simplified overview of recent price activity for different currency pairs and commodities. The Price Movement graph shows the extent and direction of price movement since the beginning of selected time period until current time. The High-Low Movement graph shows the extent of price fluctuation between the high and low prices during the same time period. This value is always positive and can be used as a simple measure of market volatility for the selected currency pair or commodity. Note: Not all instruments (metals and CFDs in particular) are available in all regions. How to use this graph. Contracts for Difference (CFDs) or Precious Metals are NOT available to residents of the United States.

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Being aware of a security's volatility is important for every trader, as different levels of volatility are better suited to certain strategies and psychologies. For example, a Forex trader looking to steadily grow his capital without taking on a lot of risk would be advised to choose a currency pair with lower volatility. On the other hand, a risk-seeking trader would look for a currency pair with higher volatility in order to cash in on the bigger price differentials that volatile pair offers. With the data from our tool, you will be able to determine which pairs are the most volatile; you can also see which are the most - and least - volatile days and hours of the week for specific pairs, thus allowing you to optimize your trading strategy. What affects the volatility of currency pairs? Economic andor markets related events, such as a change in the interest rate of a country or a drop in commodity prices, often are the source of FX volatility. The degree of volatility is generated by different aspects of the paired currencies and their economies. A pair of currencies - one from an economy that’s primarily commodity-dependent, the other a services-based economy - will tend to be more volatile because of the inherent differences in each country’s economic drivers. Additionally, different interest rate levels will cause a currency pair to be more volatile than pairs from economies with similar interest rates. Finally, crosses (pairs which do not include the US dollar) and ‘exotic’ crosses (pairs that include a non-major currency), also tend to be more volatile and to have bigger askbid spreads.

Additional drivers of volatility include inflation, government debt, and current account deficits; the political and economic stability of the country whose currency is in play will also influence FX volatility. As well, currencies not regulated by a central bank - such as Bitcoin and other cryptocurrencies - will be more volatile since they are inherently speculative. How to use the Forex Volatility Calculator? At the top of the page, choose the number of weeks over which you wish to calculate pairs volatility. Notice that the longer the timeframe chosen, the lower the volatility compared to shorter more volatile periods. After the data is displayed, click on a pair to see its average daily volatility, its average hourly volatility, and a breakdown of the pair’s volatility by day of the week. How to Measure Volatility in the Forex Market. How to Measure Volatility in the Forex Market. Measuring volatility in the Forex market enables traders to know the overall turbulence associated with a particular currency pair so as to identify the most profitable trade opportunities. An increase in the volatility of a currency pair in the foreign exchange market is usually due to major changes taking place in the economy of the country the currency represents. Here are three indicators for measuring the volatility of a currency pair. Video: How to Measure Volatility in the Forex Market. Sign up for a Live Trading Session Here. 1. The Average True Range (ATR) The Average True Range or ATR in general calculates the range of a session in pips and then establishes the average of that range over a particular number of sessions.

For example, if the ATR is set to 15 on a daily chart, it would give the average trading range for the previous 15 days. As such, this indicator gives the present reading on the volatility of a particular currency pair. When the indicator is falling , it signifies that the volatility of the pair is reducing , and when it is rising , it signifies that the volatility of the pair is increasing . It is important to note that this volatility forex indicator does not offer an inference for the direction of price trend; however, it basically gauges the level of price volatility, from high – low for the day. 2. Bollinger Bands. Bollinger bands are an exceptional indicator at showing volatility. In general, these bands are two lines drawn two standard deviations above and below a moving average for a K amount of time (with K representing any figure you choose). For example, if it is set at 30, there would be a 30 Simple Moving Average and two lines in which one line would be drawn +3 standard deviations above it and another line -3 standard deviations below it. The bands are very dynamic in nature and they automatically contract when volatility is low and widen when volatility is high. 3. Moving Averages. Another crucial volatility forex indicator — and arguably one of the oldest — is the moving average. In general, moving averages are lines drawn on charts to give the average price at a given point over a definite period of time such as minutes, hours, days, or weeks. For example, if a 30 Simple moving average is plotted on a daily chart; it would give the average movement of the market for the past 30 days. There are different kinds of averages, however. The major types most used by traders are: Moving Average Convergence Divergence (MACD) , Exponential Moving Average (EMA) and Simple Moving Average (SMA) . To learn more (a lot more) about moving averages check out this blog post . All of these averages perform similar functions and because of that, all of the averages turn out to be pretty much similar. The function they perform is to eliminate or minimize the noise that is related to the day-to-day price movements and the alluring forex trends along with whatever is plotted on the charts.

The volatility calculated on this page is called Average true range (ATR). It is calculated by taking the average of the difference between the highest and the lowest of each day over a given period. For example, with this method, let's calculate the volatility of the Euro dollar over three days with the following data. First day: The Euro Dollar marks a low point at 1.3050 and a high point at 1.3300 Second day: EURUSD varies between 1.3100 and 1.3300 Third day: the low point is 1.3200 and the high point is 1.3350. The Highest - Lowest difference over the three days is 250pips, 200pips and 150pips, or an average of 200pips. We will say that the volatility over the period is 200 pips on average. The volatility is used to evaluate the potential for variation of a currency pair. For example, for intraday trading, it may appear more interesting to choose a pair which offers high volatility. Another use may be as an aid to fix the levels of objective or stop-loss, to place an intraday objective at 2 or 3 times the volatility may be a risky strategy; conversely, one may estimate that an objective of at least one times the volatility has more chance of being achieved. I wish to buy the Euro Dollar for an intraday trade at 1.3200.

My objective is 100 pips. At the time when I want to open my trade, the low point for the day was 1.3100 and the average volatility is 150 pips, which means that on average one can estimate that the high point could be close to 1.3100+150 pips = 1.3250. Now my objective is 1.3300, or 50 pips above. In this case, my analysis shows that the EURUSD seems likely to have a stronger variation than on the previous days; I can open my position and maintain as my intraday objective 1.3300. However, if the rate shows no exceptional variation one may estimate that the objective will probably not be achieved during the day, which does not invalidate my analysis but defers my timing. US Search Mobile Web. Welcome to the Yahoo Search forum! We’d love to hear your ideas on how to improve Yahoo Search . The Yahoo product feedback forum now requires a valid Yahoo ID and password to participate. You are now required to sign-in using your Yahoo email account in order to provide us with feedback and to submit votes and comments to existing ideas. If you do not have a Yahoo ID or the password to your Yahoo ID, please sign-up for a new account. If you have a valid Yahoo ID and password, follow these steps if you would like to remove your posts, comments, votes, andor profile from the Yahoo product feedback forum. We are the easy social team. Follow us on Twitter, Facebook, G+, YouTube & Linkedin for more great articles, videos, contests, tips, news and more! Volatility (in Forex trading) refers to the amount of uncertainty or risk involved with the size of changes in a currency exchange rate. A higher volatility means that an exchange rate can potentially be spread out over a larger range of values.

High volatility means that the price of the currency can change dramatically over a short time period in either direction. On the other hand, a lower volatility would mean that an exchange rate does not fluctuate dramatically, but changes in value at a steady pace over a period of time. Commonly, the higher the volatility, the riskier the trading of the currency pair is. Technically, the term “Volatility” most frequently refers to the standard deviation of the change in value of a financial instrument over a specific time period. It is often used to quantify (describe in numbers) the risk of the currency pair over that time period. Volatility is typically expressed in yearly terms, and it may either be an absolute number ($0.3000) or a fraction of the initial value (8.2%). In general, volatility refers to the degree of unpredictable change over time of a certain currency pair exchange rate. It reflects the degree of risk faced by someone with exposure to that currency pair. Forex volatility for market players. Volatility is often viewed as a negative in that it represents uncertainty and risk. However, higher volatility usually makes Forex trading more attractive to the market players. The possibility for profiting in volatile markets is a major consideration for day traders, and is in contrast to the long term investors’ view of buy and hold. Volatility does not imply direction.

It just describes the level of fluctuations (moves) of an exchange rate. A currency pair that is more volatile is likely to increase or decrease in value more than one that is less volatile. For example, a common “conservative” investment, like in savings account, has low volatility. It will not lose 30% in a year but neither will it profit 30%. Volatility over time. Volatility of a currency pair changes over time. There are some periods when prices go up and down quickly (high volatility), while during other times they might not seem to move at all (low volatility). easyMarkets offers trading the USD Volatility index. How Forex News Affects Forex Volatility. With its almost six trillion dollars daily turnover, the Forex market depends on Forex news to move. For this reason, Forex volatility and Forex news enjoy a direct relationship. Most of Forex news comes from the economic sphere. Job-related data, changes in the size of an economy, inflation, etc., offer traders clues about the economic performance of a region or country. Traders put the economic news together to find out the shape of an economy. Thus, the shape of a currency.

But, Forex trading means buying and selling currency pairs. Hence, traders compare to economies for every currency pair. It doesn’t mean Forex traders need an economic background. Merely, it means looking at the major economies around the world, like: United States of America Eurozone Japan Australia Canada United Kingdom Switzerland, etc. Now imagine that each economy has a currency: S. Dollar (USD) Euro (EUR) Yen (JPY) Australian Dollar (AUD) Canadian Dollar (CAD) British Pound (GBP) Swiss Franc (CHF) If you combine the currencies two by two, you have the main currency pairs to trade. Hence, Forex news from those economies will increase Forex volatility. In this article, we’ll cover various aspects related to Forex market news, such as: Forex news that moves the USD What Forex news matter for the EUR and other currencies Forex volatility in different trading sessions Daily Forex news to watch How to interpret the Forex news calendar. Forex News that Moves the USD. Any discussion about Forex volatility and what causes it starts with the USD. As the world’s reserve currency, it influences the entire Forex dashboard like no other currency. Because of the dollar, the currency pairs form two categories: majors and crosses. Any major pair has the USD in its componence. Hence, a major don’t. Only by splitting the pairs in such a simple manner, traders can avoid Forex volatility surrounding critical economic events. For example, one way to prevent wild swings in the trading account is to trade cross pairs during American Forex news. After the Bretton Woods conference, the USD became the pillar of the world’s financial system.

Moreover, the Nixon shock in 1970’s decoupled it from the gold standard. From that moment, it was only a matter of trust in the USD that kept foreign investors buying it. Nowadays, the USD is still the preferred choice when nations build foreign exchange reserves. This is an enormous privilege the USD enjoys, and other countries envy the USD status. Most Relevant US Forex Trading News. The Forex calendar news out of the United States is one of the busiest of them all. Because of the dollar’s role, every market depends on the shape of the US economy. Moreover, the Intermarket correlation means the dollar will move not only the Forex market but also other markets like bonds, stocks, options, and so on. Hence, it is all about interpreting the economic news. For a currency, it is all about the interest rate level. Hence, the Federal Reserve interest rate announcement and press conferences move the dollar. And, the Forex market. The Fed meets every six weeks. On a Wednesday, right after the London’s close, the Fed releases the FOMC (Federal Open Market Committee) Statement. This is a text describing the monetary policy.

Trading algorithms or robots scan the document with lightspeed and react. Quant firms and HFT (High-Frequency Trading) algorithms buy and sell based on differences between the previous FOMC text. Sometimes, even no change, is a signal for buying or selling. Once a quarter, or every two sessions, a press conference follows the FOMC statement. Never has the Fed hiked or cut the federal funds rate without a press conference to follow. Therefore, the federal funds interest rate level is THE Forex news to watch. As a rule of thumb, the higher the interest rate goes, the stronger the dollar becomes. The Forex market volatility increases tremendously during the Fed presser. Press representatives from around the world ask questions. And, the ChairmanChairwoman answers.

No one knows the questions. And, no one knows what the answer will be too. As such, the USD makes large swings all over the charts. Effectively, it trips stops both for longs and for shorts. CPI or Inflation to Mark in the Forex Calendar News. Inflation shows the change in the price of goods and services over a period of time. Typically, the inflation or Consumer Price Index (CPI) comes out monthly. It is one of the closely watched Forex news. The market reaches extreme Forex volatility levels if the CPI deviates from the target. Traders know the Fed closely watches inflation. Part of its mandate, the Fed targets a two percent level for the CPI. However, it doesn’t look at the regular CPI. Instead, it considers the Core CPI. Or, inflation without transportation, energy and food costs. The standard interpretation is that when inflation falls, the currency depreciates. How come? When inflation is in the fall, expectations grow that the Fed will ease the monetary policy. Or, it’ll cut rates. Because there’s a lag between the two Forex news, traders react on the spot.

After all, trading is a game of expectations. Right? As a Forex volatility indicator, inflation doesn’t “damage” the charts as when the Fed changes the rates. However, if deviates strongly, the Forex volatility spikes as traders bet the Fed will react. Forex News Trading – Jobs Data. The other side of the Fed’s mandate refers to jobs. Fed vows to create jobs. Thus, it’ll change the federal funds rate level accordingly. As such, jobs-related data like: NFP – Non-Farm Payrolls ADP – private payrolls Jobless claims The unemployment rate, etc. are Forex volatility news to mark in the economic calendar. There is a direct relationship between job creation and the USD reaction. Hence, when the U. S. economy creates more jobs than expected, the USD rises. And, the opposite happens when it doesn’t. Out of all jobs data, the NFP is a great Forex volatility indicator. Released every first Friday of any month, the market keeps a tight range.

Moreover, the Forex market prepares in advance for the NFP reading. Sometimes, for more than a week. But the Forex volatility surrounding the release doesn’t depend only on the actual NFP number. Instead, most of the times the labor department releases revisions for previous data. Sometimes, those revisions dwarf the current NFP Forex news. As such, the initial market reaction may dissipate quickly when revisions exist. Another Forex News that Matters for the USD. Throughout the six weeks between two Fed meetings, the Forex news feed is full of economic releases. They come from all areas: The three sectors make the GDP (Gross Domestic Product) and help estimate the size of it. Or, the size of economic expansion or contraction. Based on the data in each sector, traders estimate the economic evolution. And, its impact on the Fed’s interest rate decision. Again, because there’s plenty of time between the economic releases, traders will respond on the spot. They’ll prepare for the Fed statement and decision by selling or buying the USD in advance.

Out of the three sectors, the services data creates the most Forex volatility. Obviously, the reason is the U. S. economy is a service-based one. Or, the services sector sits at the core of the U. S. economy. When the pillar suffers, the contagion spreads rapidly. Forex news to watch from the three sectors: ISM Manufacturing and Non-Manufacturing a survey showing the state of the manufacturing and services sector Retail Sales shows the consumer’s health Average Hourly Earnings an early indication for inflation’s evolution Personal Spending and Personal Income shows the disposable income’s evolution Existing Homes Sales shows the health of the housing sector Building Permits helps to estimate the future projects in the housing sector. These are only some of the Forex news to consider. While second-tier data, the market reacts sending the Forex volatility to extreme levels if the actual differs from the forecast. Forex Volatility Created by another Forex News in the World. While everything in Forex trading depends on the USD, some other news around the world makes the currency market moving. Keep in mind that a currency’s value depends on the counterpart currency. For example, if you say that the USD is 1.27, that’s irrelevant.

A correct statement says the USD is worth 1.27 CAD. As such, there’s another currency to judge. Hence, another economy to interpret. When Forex news out of Canada comes out, the CAD may strengthen. As a reaction, the USDCAD tumbles, without the USD having anything to do with it. Just that the valuation changed. European Forex News to Consider. The Eurozone economies form the second largest economic block in the world. Thus, the Euro’s role in creating Forex volatility shouldn’t be ignored. Despite the general belief, in Europe only a few events matter: European Central Bank (ECB) interest rate decision and press conference every six weeks the ECB announces the interest rate level and holds a press conference after each meeting inflation released monthly, it holds the key for the future ECB moves PMI’s (Purchasing Managers Index) a survey, the equivalent of the ISM in the United States. The Forex volatility surrounding the ECB reaches extreme levels.

Sometimes, without the ECB President saying nothing new, the market shoots higher or lower, breaking essential levels. The United Kingdom and Australian Economic Data. Even though the two economies are far away from one another, there are many similarities between the two. One, for example, is the fact that back in time the Australian Dollar was, in fact, the Australian Pound. Besides the two central banks’ meetings (Bank of England and Reserve Bank of Australia), the two currencies react to: Both Australia and the U. K. release the PMI Construction, analyzing the construction sector carefully. The Pound and the Aussie Dollar are popular currencies. Regarding Forex volatility, the GBP pairs reach extreme levels easier than Aussie pairs. As a particularity, the AUD is a commodity currency. Hence, anything from the gold and other precious metals news makes the AUD moving. Different Economies to Watch Too. Japan faces a terrible crisis. For decades, there’s no inflation. Because of the aging population and cultural problems (e. g., difficult to immigrate to Japan), Japan is a closed society.

It makes it difficult to rely on external sources. All progress must come from within. Bank of Japan was the first central bank to tap uncharted territory in monetary policy. It bought Japanese government bonds of unprecedented size, and in vain. Two events from Japan create Forex volatility: Bank of Japan (BOJ) monetary policy shifts Tankan report. The later is a comprehensive report about the entire Japanese economy. When gloomy, the JPY tanks. SNB and Forex Volatility. The Swiss National Bank (SNB) made Forex volatility charts experience new levels. In 2015, the SNB dropped the EURCHF peg. For years, the bank held the cross at an artificial rate. It promised to buy and maintain the level, no matter what.

However, 2015 proved too tricky. The ECB prepared to launch its quantitative easing, making it impossible for the SNB to hold the peg. Faced with massive losses, the SNB gave up and lost tens of billions on the move. As history tells us now, it recovered all the losses and some more. But, in those days, the SNB action created mayhem on the currency market. This is just another proof that Forex news doesn’t have to come from the Forex news calendar. Instead, a groundbreaking decision changes everything. Forex Volatility in Different Trading Sessions. Forex trading goes around the sun. It starts with Asia, Europe, and ends in America. Rinse and repeat. The biggest financial center in the world, London, takes the central stage. Now that Brexit became a reality, things may change. However, the London sessions stand out as the one where Forex volatility is on the rise. Next, the United States session follows. Because there are some hours where trading goes on both sessions, Forex volatility is at its peak.

That’s especially true at the so-called fixing times when the clearing houses buy and sell and most of the options expire. After the fixing and London close, the North American session loses steam. That is, if no Forex news comes later, like the Fed interest rate decision or the FOMC Minutes. Daily Forex News to Watch. The term Forex news doesn’t refer only to economic news. Instead, it consists of all news with the potential to influence the currency market. Therefore, the Forex calendar news contains other events like: Central bankers’ speeches Fed Chair semi-annual testimony in front of the U. S Senate ECB President’s testimony in front of the European Parliament Presidential elections, referendums, etc. Political summits. They all move markets, together with the news that come from unexpected places like: Natural catastrophes Wars Economic wars (g., imposing tariffs) Geopolitical events G7, G20 meetings, etc. As probably is obvious, Forex volatility depends on more than the classic economic events. You’ll never know what happens next, and how the markets will react to it. Perhaps this is one of the reasons why so many retail traders find this market so attractive. The Forex market is like an entity that changes continuously. In a way, it is only reasonable. Almost a decade ago, the execution of a trading order took longer than today.

Even the trading accounts for the retail trader were different. To have an idea, the spread for the most popular pair, the EURUSD, had three pips. Three full pips! Nowadays, event 0.2 or 0.3 exists. Thus, it means the market changed together with new technologies. Forex volatility changed too. It is hard to tell if for the worse or for, the better. When Forex volatility is on the rise, retail traders blame the High-Frequency Trading (HFT) industry. The robots are responsible! What can we do? When volatility misses, whose to blame? You guessed: still, the HFT industry, as the super-computers buy and sell so fast as levels barely move. There’s always supply and demand of almost equal sizes.

Forex news is a big driver for volatility too. As explained here, only the prospect of a bit economic decision is enough to make markets still. Forex traders should be prepared for anything. Despite having a stop loss in place, there’s no total protection for a trading account. Macroeconomic trends became so crucial that currencies react the first to changes. News from parts of the world far away (e. g., North Korea launching missiles) make markets tremble. First, the stock market reacts. If the news is negative, it’ll tumble. Second, when the stock market closes, the futures market takes it from there. And so on. Like a snowball, it’ll roll over, and the effect appears on the Forex market too. First, the JPY, and then the other risk onrisk off pairs.

To sum up, every piece of economic, political, etc. data, is Forex news. Because high-impact Forex news leads to higher Forex volatility levels, it is part of a trader’s job to trade the news too. GET STARTED WITH THE FOREX TRADING ACADEMY. Damyan is a fresh MSc International Management from the International University of Monaco. During his bachelor and master programs, Damyan has been working in the area of financial markets as a Market Analyst and Forex Writer. He is the author of thousands of educational and analytical articles for traders. When being in bachelor school, he represented his university in the National Forex Trading Competition for students in Bulgaria and got the first place among 500 other traders. He was awarded a cup and a certificate at an official ceremony in his university. How to Use Forex Volatility Statistics. It’s possible to track how much a currency pair moves on average each day, how much it moves each day of the week, and even how much it moves each hour. This information, which is readily accessible, aids traders in making better trading decisions, such as when to enter and exit trades, and where to set profit targets. Wouldn’t it be nice to know if the EURUSD is likely to move 60 pips today, or 90, or 120? While we can’t know for sure what a currency pair will do on a given day, we can use averages to give ourselves a good idea. Forex volatility statistics provide this for us. We can see how much a currency moves on average each day, how much it tends to move each day of the week, and how much a currency pair tends to move each hour. For reasons we will discuss below, there are significant benefits to having and tracking this information on a regular basis. Mataf provides easy to understand volatility charts.

Oanda provides a Value At Risk calculator, which can also be used to estimate volatility over different time frames. The figure below shows multiple currency pairs. The columns along the left show various currency pairs along with a small graph with the recent price trend. The column we care about the most is the one called “pips”. This is how many pips the currency moves, on average, in a 24-hour period. By default the average is calculated based on the last 10 weeks of price data. This can be altered by putting in a different amount of time, such as 5 weeks, or 20 weeks in the Formula box and then clicking the refresh button next to it. Source: mataf. net Nov. 1, 2017 – Click to enlarge. Click on a currency pair to bring more detailed data. In the figure above the EURCAD pair has been selected, which brings up additional charts on hourly volatility and day of the week volatility. While the “pips” column gives the average of how much a pair moves each day, certain weekdays tend to be more volatile than others. In the example above, the EURCAD has average daily movement of 114.84 pips, but Monday (1) and especially Tuesday (2) tend to have volatility lower than the average. Wednesday (3) and Friday (5) tend to have volatility above average. Thursday (4) is close to average. Within each day, certain hours are more volatile than others.

The hourly chart is set to the GMT time zone. The current hour and day when you view these charts, on Mataf, are always marked in yellow. In this way, you can make a quick time conversion if needed. For day trading, consider trading during the times of day where there is increased volatility, and avoid day trading during the hours when volatility is really low. Please note that this is a snapshot in time, and these statistics will constantly change. The hours that are most volatile tend to stay the same, but how much the price moves during these hours will change. Which weekdays are most volatile also tend to stay the same, but could change over time as well. When you click on a currency pair on the Mataf volatility statistics you will also see a third chart. This chart shows volatility over the last several years. This is useful for assessing overall market conditions. For example, you may have had a phenomenal year day trading or swing trading last year, but then over time you start struggling. It could be a change in volatility. The chart below shows the long-term daily volatility in the EURUSD.

Back in 2010, 2011 and 2015, the EURUSD was moving more than 140 pips. That makes it a little easier to jump into strong trends. In 2014, 2016 and 2017, volatility was largely below 100 pips per day on average. Do you think a 40% or more change in volatility could affect your trading? It will, meaning we need to adjust for such changes. Source: mataf. net Nov. 1, 2017. Ways to use Forex Volatility Stats. There are multiple ways to use forex volatility statistics. Some of those ways are discussed below. –Changes in volatility can be used to confirm changes in direction, or point to an acceleration of the trend. Sharp moves to me are more important than a meandering price which has little force behind it. For more on this topic, see Velocity and Magnitude. –Volatility is often associated with a change in the direction. Trends are often complacent, reversals are not. Therefore, heightened volatility is usually seen during corrections within trends and in trend reversals.

–While a pair moves a certain number of pips in 24 hours, it will move less during the specific hours we are trading (since we can’t trade all day). For instance, the EURUSD may move 120 pips per day, but only move 85 pips during the US session, or 75 pips during the European session. If the daily figure is used, but we are only day trading for a few hours each day, the statistic could be very misleading. If day trading, be aware of the specific stats for the time of day you are trading. See Best Time of Day to Day Trade Forex for more details. –During a trend volatility is often steady or will decline. If the trend accelerates we will see a rise in volatility. This can be a confirmation or a signal the market is nearing a turning point (a very powerful volatility thrust after a long-term trend is called a “blow off”), but it depends of the maturity of trend. An example of a trend accelerating in a “blow off” fashion, which led to a big trend reversal, is the USDCHF in August of 2011. –Changing the number of weeks that are averaged on the volatility study may greatly affect the data provided.

If you are a short-term trader, track volatility statistics based on the last 3 weeks or less. Longer-term traders can benefit from looking at volatility averaged over the longer term (default is 10 weeks). All traders will want to monitor volatility over time, as this may provide insight into reasons for improved or lack-luster trading performance. –Intraday volatility, which is the number of pips a currency pair moves in day, provides a lot of information about where to place profit targets and when to enter trades. If you wish to exit a position today, the chances of an order filling well beyond the daily average range are slim, unless there is a significant news event occurring. Say the EURUSD already moved 100 pips today (distance between high and low), and average movement is only 80 pips for the weekday you are trading (subject to change). If you buy near the high, expecting the price to go even higher, you are going against the statistical odds. Buying near the high and placing a target 20 pips above means the price will have to move 120 pips that day…well beyond the average of 80. While it could happen, it’s not a high probability trade. Same with taking a trade near the low of day, in this case, and expecting the price to drop even more. If the price has already moved beyond what it typically moves in a day (and there is no major news that is driving the increased volatility), it’s a low probability trade to expect the price to keep expanding its range a lot more. That said, an average is just an average. It is not a crystal ball. Any particular day may be more or less volatile than the average indicates. Intraday volatility should be on a day trader’s radar, but it is not the only factor to consider. –Volatility lets us know when to trade, and when not to. Day traders are especially susceptible to the cost of paying the spread, and when volatility drops so does profit potential.

Less volatility, and reduced profit potential, makes the spread more expensive. Therefore, short-term traders usually benefit by NOT trading when volatility is very low. –Certain days of the week provide greater opportunity. Certain hours of the day are more volatile than others. Stick to the day and times that offer you the greatest opportunity. This may vary depending on your strategy. –If your trades last more than a week, the daily data provided by Mataf may be overkill…you simply don’t need that much data. Apply an Average True Range (ATR) indicator to your charts, and this will likely provide you with all the volatility information you need. –If using an ATR, you can change the time frame of your chart from daily to weekly. On a weekly chart, the ATR will show how much that currency pair typically moves over a one-week period. –Volatility is always changing.

Monitor changes in volatility, especially if your strategies are sensitive (most are) to these changes. Final Word on Forex Volatility Stats. This is a brief introduction on how to use forex volatility statistics. Traders are encouraged to educate themselves further on volatility and statistics. Refer to the Daily Forex Stats page for forex volatility resources, as well as other trading statistics such as correlation. You may find that being aware of volatility helps you control risk, find alternative trading strategies and alert you to potential dangers or opportunities. By Cory Mitchell, CMT. Check out my Forex Trading Strategies Guide for Day and Swing Traders eBook. Over 300 pages including forex basics to get you started, 20+ forex trading strategies, and how to create your trading plan for success. Forex Training Group. Volatility is the change in the returns of a currency pair over a specific period, annualized and reported in percentage terms. The larger the number, the greater the price movement over a period of time. There are a number of ways to measure volatility, as well as different types of volatility. Volatility can be used to measure the fluctuations of a portfolio, or help to determine the price of options on currency pairs. Understanding and learning how to measure volatility in the foreign exchange markets is a must for every serious trader. Different Types of Volatility.

There are two specific types of volatility. What has already happened is known as historical volatility, whereas what market participants think is going to happen is referred to as implied volatility. The former, can be used to predict the latter, but the latter is a market input, determined by the people that are participating in the forex options market. The market’s estimate of how much a currency pair will fluctuate over a certain period in the future is known as implied volatility. Option traders can use a currency volatility index to price options on currency pairs. Implied volatility is generally considered a measure of sentiment. When the currency markets are complacent, implied volatility is relatively low, but when fear infiltrates the market environment, implied volatility rises. Implied Volatility is used to Value Currency Options. Implied volatility is a critical component of option valuations.

There are two main style of options on currency pairs – a call option and a put option. A call option is the right but not the obligation to purchase a currency pair at a specific exchange rate on or before a certain date. A put option is the right but not the obligation to sell a currency pair at a specific exchange rate on or before a certain date. The exchange rate where the currency pair will be transacted is referred to as the strike price while the date wherein the option matures is called the expiration date. Forex options are quoted by dealers in the currency markets in two different ways. Dealers at times will quote a number that describes the volatility expected for a specific option that expires on a certain date. At times they will quote the price of the option. Options on currency futures are always quoted as a price. Options on currency exchange traded funds are also quoted as a price. The price of a currency option incorporates the market volatility of a currency pair; which is how much market participants believe a market will move on an annualized basis. If you are an active currency options trader you will likely be aware of the implied volatility of each major currency pair. For those that are not actively trading options, there are some tools you can use to find current options implied volatility. Determining implied volatility for a financial instrument requires certain inputs. The equation is an options pricing model.

The most widely used and famous options pricing model is the Black Scholes options pricing model. Currency Options Pricing. An options pricing model uses several inputs which include the strike price of the option (which is an exchange rate), the expiration date of the option, the current exchange rate, the interest rate of each currency, as well as the implied volatility of the forex option. The calculation determines the probability that the underlying exchange rate will be above or below a strike price, depending on whether you are generating a price for a call or a put option. All the inputs for the Black Scholes Pricing model are related to one another and therefore if you know the price of the option, you can back out the implied volatility of the forex option. So, if you see the price of an option (or the bid offer spread of an option), you can use an options pricing model to find the implied volatility of the currency pair. A simple options calculator will allow you to input a price and find the fx option volatility of a specific currency instrument. Another simple way to get the volatility of a Currency ETF is to use Yahoo Finance. The options chain example above shows a one-month option price that is closest to the money ($106), has implied volatility of 7.73%. This is a way of estimating what options traders believe will be the movement of the FXE (Currencyshares Euro Trust) over the course of the coming year. Once you know where current implied volatility is, it is helpful to understand where it was in the past.

There are some free versions of software that will show you historical volatility. Ivolatility. com, offers a forex volatility chart which can help you determine the relative level of implied volatility. The free version shows currency ETF implied fx volatility index for 52-weeks, and is helpful in determining the relatively strength of present implied volatility. There are a few software packages available that will allow you to view long term historical volatility on currency futures as well as currency ETFs. This type of software will allow you to perform many different types of technical analysis studies on historical volatility. Since implied volatility is generally a mean reverting process, you can use different technical studies that measure this – such as the Bollinger bands indicator. Technical Methods for Measuring Volatility. The Bollinger bands indicator show a 2-standard deviation band above and below the 20-day moving average. These defaults can be changed, depending on how wide you believe the distribution should be. So you can use a 3-standard deviation on a 50-day moving average if you prefer. When the implied volatility index hits the Bollinger band high which is 2-standard deviations above the 20-day moving average, implied volatility could be considered rich, and when the implied volatility hits the Bollinger band low (2-standard deviations below the 20-day moving average), the level is considered cheap.

This type of analysis helps the forex trader implement volatility based strategies. Additionally, you can use Bollinger bands to evaluate the volatility of any security. The difference of the change in the Bollinger bands (change in standard deviations) is a measure of historical volatility. The Bollinger band width is a measure of the difference between the Bollinger band high minus the Bollinger band low. As the Bollinger band width expands, historical volatility is rising and when the Bollinger band width contracts historical volatility is falling. Understanding Historical Volatility. In addition to evaluating implied volatility to determine how volatile the market could be, you can also evaluate what has happened in the past to determine future volatility. This is known as historical volatility. Historical volatility tells us how much the market has moved on an annualized basis. The historical volatility is calculated by defining several parameters.

First, you need to decide on the period which for you are calculating the change in price. Historical volatility is calculated by analyzing the returns; which is the change in the value of a currency pair. The basic period can be a one-day change, which is often used, or a 1- week or 1-month change. You will also need to determine how many periods you plan on using in the calculation. This process can be easily accomplished with excel or by using a calculator. What you are actually trying to calculate is the standard deviation, which is the average squared deviation from the mean. The last thing you need to do is annualize the number by multiplying the volatility by the square root of time which is the days in a year. The output number is a percent value which tells you the annualized movement of the returns of a currency pair. You can use different technical analysis tools to help you gauge historical volatility. There are many times that current implied volatility is higher or lower than historical volatility.

Remember that historical volatility represents the past, and implied volatility represents what traders believe will be the future. Another statistical indicator that is widely used to measure historical volatility is the Average True Range (ATR) indicator developed by J. Welles Wilder. This indicator was developed to measure the actual movements of a security for implementing trading strategies around volatility. The average true range differs from a standard range formula as it incorporates gaps in price action. The technique used by Wilder was to incorporate absolute values which guarantees positive numbers. The key is to measure the distance between two points regardless of the direction. So why would you want to know the historical volatility of a currency pair? One important reason is it can help you manage your risk. Most traders do not sufficiently consider the risks of trading. However, the serious trader understands and incorporates volatility into their trading plan. Whether you are managing one currency pair or a basket of currency pairs it is helpful to understand the overall risks of your portfolio. Value at Risk (VAR), is a way of describing the risk within a portfolio of currency pairs.

The process of analyzing the returns of multiple currency pairs is essential in determining the capital you have at risk. If you have ever had a situation wherein you have multiple currency positions open at any one time, your risk is very different than having a position open in just one currency pair. What you are attempting to define with VAR is the amount of funds you would lose or gain with a specific movement of your portfolio. Measuring Risk with Value at Risk (VAR) Value at Risk can be determined using a few basic methodologies. You can use an analytic solution which uses historical volatility to determine the variances in a portfolio. A second measure is to use simulations. This means that you look at all the historical paths that were taken over time and simulate the most probable scenario. The more data you have the more likely you will be able to find a solution that is pertinent. Monte Carlo simulation is a popular method for sampling of values in a data series. Of course there are drawbacks to using VAR as the only strategy to measure market risk.

First, there are many assumptions that one can use to define a VAR, which means there is no standard measure. Liquidity plays a role in defining your ability to use VAR as a risk management tool. If you are running a portfolio of currency majors, your liquidity will be different compared to running an emerging market portfolio. One of the assumptions with VAR is that you will be able to exit with specific parameters. VAR works well with assets that are normally distributed and will not see outside movements caused by political unrest or currency manipulation. VAR also has a relatively narrow definition and does not incorporate other types of risk management challenges such a credit risk, and liquidity risk. The calculation is purely focused on market risk and could provide a false sense of security if used as a standalone measure. Additionally, VAR shows a trader the greatest adverse effect of a market move on a portfolio. With currency pairs, there are up and down moves which need to be taken into account when measuring the risk of a portfolio. There are a number of reasons you would want to know the most volatile currency pairs.

The first is to determine the risk you are assuming. It is important to know whether an asset has moved 100% in the last year or 10%. Understanding the risk of a currency pair or a basket of currency pairs is imperative to a successful trading strategy. Having a robust entry signal is only helpful if you have a sound risk management strategy. Closing Thoughts and Some Additional Considerations. Implied volatility will provide you with the markets estimate of how much the market will move. Historical volatility is the actual volatility that occurred in the past. Generally, implied volatility is higher than historical volatility. The volatility for the majors in the currency market are relatively subdued relatively to individual stocks or commodities. Rarely does implied volatility for major currencies move above 15%, but this is quite common for individual stocks. The volatility on the S&P 500 index averages around 14%, and has seen spikes as high at 48%. And individual stocks can experience much higher volatility than the Index. Implied volatility for currency crosses will generally be higher than the implied volatility of the majors. The most volatile forex pairs are exotic currency pairs which can have volatility numbers that are as extreme as some individual stocks. Implied volatility can also help you measure sentiment.

Traders will associate high level of implied volatility with fear and low levels of implied volatility with complacency. Market extremes usually occur when sentiment is at its highest or lowest levels. With this knowledge you can measure the markets pulse by gauging sentiment using implied volatility levels. By graphing implied and historical volatility, you have a way of measuring perceived future sentiment as well as actual historical sentiment. This can allow you to see how the markets reacted after an event or before an event occurred. You can use a number of technical indicators to help gauge where volatility might be going in the future. By incorporating volatility into your trading plan, you can enhance your return and fine tune your risk management techniques.


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