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 some of the best volatility indicators that can assist you in measuring the volatility of a currency pair: ATR is a volatility forex indicator that most experienced traders use to gauge the volatility of the market.
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. In general, the ATR computes 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.
Bollinger bands are an exceptional volatility forex indicator since they are designed to show 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. The bands are very dynamic in nature and they automatically contract when volatility is low and widen when volatility is high. Another crucial volatility forex indicator — and arguably one of the most ancient — applied by most forex traders are moving averages.
There are different kinds of averages, however. The major types applied in the forex trading market are: 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.
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. These indicators should give you a good overview of volatility, which fuels profitable forex trading!
Zero in on Profits with the Momentum Breakout Strategy. You must be logged in to post a comment. Contact Us Search Login. How to Measure Volatility in Forex. By Market Traders Institute. About Market Traders Institute. Leave a reply Click here to cancel the reply You must be logged in to post a comment. Forex Basics FX Blog. October 23, - by Market Traders Institute.More...