Why Is Volatility A Trader's Best Friend
Why Is Volatility A Trader's Best Friend
Volatility In Forex Trading
Learn how to take advantage of volatile markets and why you should view volatility as your best friend in this forex blog.
When trading forex, currency pairs react to market conditions... When people get overly greedy, the price goes up, and when people become fearful, the price falls.
What is volatile?
Volatility is a statistical measure of the tendency of a market or security to rise or fall sharply within a short period of time. Volatility is typically measured by the standard deviation of the return of an investment.
Human beings have not changed for thousands of years. We have certain instincts built into us that make us do things we have almost no control over, and fear and greed are two of those emotions.
Buy when people are greedy & sell when they are scared.
It's often been said that when you look at a chart, what you are actually looking at, is human behavior. The never ending peaks and valleys that you see on a chart is human fear and greed being shown in numbers.
SMA AND MACD FOREX TRADING STRATEGY MADE ME 86% IN 2016
The idea that we could predict when people become too greedy or too fearful has fascinated analysts, mathematicians and traders since the profession has been invented. The reason it has fascinated them is because they all knew that the person who could predict those points on a chart would virtually own his own perpetual money machine.
Here's the big secret... Knowing when there is volatility is not the real advantage, because by the time you see the volatility, it's probably too late.
How 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.
Using these indicators can help you tremendously when looking for breakout opportunities.
Moving Average
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.
For example, if you applied a 20 SMA to a daily chart, it would show you the average movement for the past 20 days. 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.
Bollinger Bands
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.
So if we set it at 20, we would have a 20 SMA and two other lines.
One line would be plotted +2 standard deviations above it and the other line would be plotted -2 standard deviations below. When the bands contract, it tells us that volatility is LOW. When the bands widen, it tells us that volatility is HIGH.
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.
The real advantage is knowing when volatility is ABOUT TO HAPPEN. In other words, predict, before anyone else knows when the market is about to take off like a rocket or drops like a rock.
