Volatility in Forex - what it is and how to use it

Good time of day, dear forex traders. Today we will focus on the concept of volatility in the Forex market. We will talk about what it is, what it depends on, and most importantly - how we can apply this data to build and improve our own trading strategies and, as a consequence, get greater gains from trading.

Services for getting data

• https://www.mataf.net/en/forex/tools/volatility
• http://www.myfxbook.com/forex-market/volatility

What is volatility?

Volatility is a range of price change from maximum to minimum in the course of the trading day, week or month. The higher the volatility, the higher range within the trading time period. It is believed that because of this the higher the risk of your position, but you get more opportunities to earn money.

Volatility can be measured over different time frames. If we open the daily chart and measure the distance from high to low, then we obtain the volatility of the day:

It turns out that on the screenshot above, it was 50 points.

We can also measure it in another time period, for example, on the weekly chart:

The distance from the high point to low point was 172 points. Overall volatility during the week was 172 points. Volatility can be measured within a trading session or within a trading hour. This allows us to conclude that this value is fractal.

As a rule, average volatility for the last N candles is taken into account. If you take the daily charts, average volatility is usually calculated for the last 10 days. Roughly speaking, the last 10 candles are added up and divided by 10.

What the volatility depends on?

It depends on the number of transactions on the market, traders, trading session, the general state of the economy of one or another currency and, of course, on the speculation. On how speculative the market for this currency is. Note that volatility can be measured in both points and in percents. But it is worth noting that most often volatility of the shares is measured in percents. Most common on forex is a measurement in points. If you are told that the average change in prices of the pair EURUSD is 0,7% then you can easily convert it to points. Conversely, percents calculated from the points if you need it for any research. Now let’s turn to the main issue.

How to apply the volatility data to get profit?

In fact, everything is quite simple. As the saying goes, everybody knows about it, but no one uses. It is especially true about intraday trading. No one wants to apply the simplest rule.

Suppose you know that the average volatility for the GBPUSD pair is 120 points. Question: If in the beginning of the day the price went up on 100 points, should you open a buy position? The answer is obvious - we should not do that. Because the probability that the price will take some number of points is too small. Consequently, it is not necessary to open the buy position and should focus on the bearish position. But for some reason, people forget about this simple technique and follow their systems. I believe that it is necessary to include volatility, at least in intraday strategies to your checklist to enter the market.

Similarly, we can do with higher timeframes. Suppose that we know that the average volatility per week in GBPUSD is 200 points. If on Monday the pair passed 50 pips, we can expect that the price will continue to move down, there is a potential of about 150 points.

Of course, there are days when some movements are more or less strong, but we try to rely on statistics.

With the help of volatility, it is possible to calculate the size of stops and takes. If we decided to focus on the volatility data and open GBP sell position, then we would not have tried to put a large (relatively to the weekly timeframe) take profit. Because our expectations within a week are 150 points. To determine the stops we would have taken advantage of special indicators. In addition, we would watch for the channel size.

If the average volatility of the pair is 200 points, it is foolish to expect 1000 points movement. At least within a week. Thus, volatility can also be used for risk calculations. If you have opened a lot of positions on different pairs, it is possible to calculate what would happen if all stop-losses work out. Of course, the market is not obliged to obey your calculations, but it gives some support for your convenience and trade.

How to calculate the volatility?

Of course, you can manually measure every candle and then divide by 10 using a calculator. It is not so difficult. But there are special services that help to make the calculations automatically.

One of these services is Mataf.net. On the site you need to choose the “Forex” > “Trading Tolls” > “Forex volatility”: and in the opened window, we can already work with the data:

By default, it shows the statistics for 10 weeks. The pair EURUSD will be automatically set. If you need statistics for another pair, simply choose from the list on the left and get the data.

Let’s take a pair of GBPUSD. We see that the average volatility per day is 117 points. You can see the volatility by hours during the day. Traders who sell, say, on M5, can use it.

For this pair, the average volatility per hour is 34 pips. Imagine that you get a signal to buy during an hour, and the price has already passed the 20 points. In this case, it is not necessary to intrude. Only on the condition that the next hour price will continue to move.

So, in this service, you can see the volatility of any trading pair. The time on the website is set to Greenwich Mean Time. So we see the statistics that can be analyzed and used in the trade. So, the most volatile hour for the pair GBPUSD as of this writing - 15:00 GMT - 47.8 points:

Also you can view the data by days of the week. The most volatile day here is Thursday, and the least - Monday:

Again, these data can be used to build or adjust your strategy. Surely you have already got some ideas as we move forward.

Lower you can see the historical volatility:

It is useful for testing strategies on history. It can be concluded that in 2009 was the highest volatility. And at the moment it is averaged. Similarly, we can deal with other currency pairs and metals, such as gold or silver.

Also, volatility data can be viewed on myfxbook.com service. It must be known to you as a trade monitoring website. But here as well, there are additional tools to see volatility.

To open this, we find «Market -> Volatility» section:

And get depth data on trading pairs:

According to our pair GBPUSD, we may see volatility: 1 minute, 5 minutes, 15 minutes and so on. It can be used in trade. In addition, you can change points on percents and also look for a pair with the values of the volatility in the specified limits (for example, let’s find the pairs with volatility higher than 50 pips):

If you press the tab “More”, you can add some additional pairs:

At the service, which we discussed above, for example, there is some pairs, (e.g. USDRUB), and this service can be included in the list.

Personally, I prefer to use Mataf, but you can make it easier and use both services because of their different capabilities. On Myfxbook there are 1-minute data available, but on Mataf are more charts and more information. Use both of these services to build and adjust your strategies.

Indicators based on volatility

I’ll tell you about the standard indicators that default in the terminal.

The first indicator is ATR:

Indicator of average true range invented back in 1972. It shows the average volatility, and it is used mostly for setting targets and stop losses. The indicator value is multiplied by some factor and thus calculate the stop-loss and/or take profit. Calculations will be automatically changed depending on the current volatility.

Volatility is greater, take profit becomes greater. Volatility is smaller then take profit becomes smaller.

The next indicator is CCI:

It is based on data on the average price and the moving average. Used as an oscillator, so it is recommended to buy when you are in the oversold zone. And when you are in the overbought zone - to sell.

Another indicator that is known to all are Bollinger Bands:

They consist of a standard moving average and the moving average plus and minus the standard deviation, which is calculated based on price. These bands are most commonly used to determine the motion of the boundaries of the standard average. We can draw conclusions on the basis of this indicator on the movement completion, correction, etc.

In this article, I have tried to give you the understanding of what is the volatility in the forex market, and most importantly, how we can apply it in our trading. I hope that this information will assist you in developing and adjusting your own trading systems.

Regards, Michael

ForexTraderPortal.com