How to Measure Forex Market Volatility
Forex Market Volatility , this time we will discuss how we measure volatility in the forex market.By knowing the level of trading volatility, we can apply the right trading (breakout) strategy, especially related to risk management.
It should be stated again that the intended volatility in the forex market is the level of price differences in a certain period of time and not the number of trading volumes. How, remember?
Very few indicators can be used to measure volatility in the market but we can use the following indicators to help see opportunities for potential breakouts in price movements.
Moving averages are simple tools but are capable of displaying invaluable data and are sure to be used by almost all forex traders.
In short, moving average is an indicator that calculates the average price in X periods. With X is the number of periods you want.
For example, if you display 10SMA in the daily chart, the trading platform will display the average price in 10 days. For more details about moving averages, you can visit the previous lesson.
is a very appropriate indicator to measure the level of market volatility because this indicator is indeed used to do that.
Bollinger bands are basically two standard deviation lines above and below the moving average for X periods.
So when we set the bollinger band 10 settings it means we will have 10SMA and two other lines. A line will be plotted +2 standard deviations above the moving average line and -2 standard deviations below the moving average line.
When bollinger bands narrow ( contract ) this indicates that volatility is in low condition and when the bollinger band widen ( widen ) indicates that volatility is in high condition.
It is a very good tool to measure the volatility of the forex market because it is able to give us an idea of the market volatility in the X period range with X being the period or time you want.
So when you set ATR with 10 that means you want to see the forex market volatility in the last 10 days.
When the ATR line is below, this indicates that the market is having low volatility and vice versa when it is above shows that its volatility is high.