Volatility of the currency or stock market
This concept plays a huge role when trading on Forex or other financial exchanges.
It is directly related to practical trading and serves as the main guideline for setting stop orders, and can also be useful in some other situations.
Market volatility is the range of price movements over a certain time period, that is, how much the price has changed over a given period of time.
In practice, two variants of this concept are considered - relative and complete, depending on for what purposes the obtained data is planned to be used.
By determining the value of daily volatility, you immediately get an idea of how dynamic the market is, and by conducting a comparative analysis of several pairs, you can identify the most attractive trading instrument.
For example, when the market opened, the price of the EUR/USD currency pair was 1.3515, and at the close of the session, one euro was already worth 1.3595 US dollars. As a result, we can say that the daily market volatility was + 80 points. In practice, I often resort to the second definition.
In the second case, we take as a basis the range of movement of quotes, that is, its lowest and highest value on a certain time frame.
For example, let’s again take the EUR/USD currency pair; during the day its value dropped to the level of 1.3500 and rose to 1.3600, in this case the price corridor was 100 points.
What does relative market volatility give us in practice?
Calculate the feasibility of opening a transaction, for example, the spread for the selected currency pair is 20 points, and the average daily market volatility is only 10 points, so the transaction will have to be opened for more than one day or not opened at all.
You can also take this indicator into account when setting a take profit to predict the planned profit.
The value of total market volatility allows you to evaluate the dynamics and correctly select the direction of the transaction; it can also serve as a guide when placing a stop loss order.
This concept is often associated with financial risks when assessing the dynamics of changes in an asset; in this case, variability is indicated in relation to the initial cost as a percentage of possible changes.
For example, over the year the value of the euro in US dollars changed by +12% and -8, that is, the indicator for the year in this case is equal to 100% +12% or -8%, the total market volatility for euro/dollar for the year was 20 %.
Low and high volatility of the exchange market
Hyper volatility is simply an exorbitant dynamics of movement for any asset. Here, the valuable distance already traveled must be measured not in hundreds of points, but in percentages or, in exceptional cases, tens of percentages.
The greatest dynamics at the moment are observed in cryptocurrencies, the most striking example is Bitcoin, its dynamism is simply enormous. In just one day, the price of the bitcoin/dollar currency pair can go up 10-40 percent, which is now the highest figure among currency pairs.
Oil futures continue to amaze with their volatility; during the 2020 crisis, the price of black gold dropped by more than 100% in just a few days, breaking the record previously set by Bitcoin.
It would seem that this level of rate change rate significantly expands the possibilities of earning money on the stock exchange, but also significantly increases the risks of losing the deposit.
Therefore, when choosing Bitcoin or oil futures as a working asset, you should not use large leverage and it is advisable to use only intraday trading strategies. Low volatility also has its drawbacks; first of all, such assets are only suitable for implementing long-term strategies, since price changes are rather insignificant. In addition, there may be a drop in liquidity, which entails an expansion of spreads and other broker commissions.
Volatility indicator - http://time-forex.com/indikators/indikator-volatilnosti-s-povyshennoj-effektivnostyu will help you assess how active the market is and make the right decision.