How to measure volatility in Forex Trading

Volatility refers to the measure of the amount that the price of a given currency pair fluctuates within a stipulated period. A currency pair can be termed to have high volatility if the range of its price fluctuation both upward and downwards is too wide, and low volatility if the range is small.

As a serious trader, you must learn the art and science of measuring forex volatility.

High-volatility is quite attractive for traders as it translates to large price movements. Large price movement create a perfect breakout opportunity, but don’t forget the risk is also very high in such conditions. As a trader it’s good to take into perspective the entire scenario as it’s likely to play out. The potential for loss is very high in the event that you happen to be on the wrong side of the move.

Types of Volatility

Generally, there are 2 types of volatility; historical volatility and implied volatility.

·         Historical volatility – refers to past market trends

·         Implied volatility – refers to future predictions by market players of what is likely to happen

Historical volatility is a useful tool as a trader to use to predict how the trading tides might turn.  

Therefore, given historical volatility is actually what happened and how the market reacted to specific events, it forms an ideal basis for making future predictions. Ideally, no one set of indicators is a sure bet to predicting the future movements. Though historical price movements can aid in determining probable future price movements.

Additionally, there are technical analysis methods used for measuring volatility referred to as volatility indicators: -

·         The Bollinger bands

·         The Average True Range (ATR)

·         The Parabolic SAR

·         Moving Average

These indicators are useful tools to help you the trader look out for breakout opportunities.

In a nutshell, every serious trader must incorporate volatility into their trading plan if you plan on winning. This will not only help in making your returns look good, but also help streamline your risk management techniques.