Volatility of the currency or stock market
This concept plays a huge role when trading on Forex or other financial exchanges.
It has a direct bearing on practical trading and serves as a primary guideline for setting stop orders, and can also be useful in some other situations.
Market volatility is the range of price movement over a given time period, that is, how much the price has changed over a given period of time.
In practice, two versions of this concept are considered: relative and complete, depending on the purposes for which the obtained data is planned to be used.
By determining the daily volatility value, you immediately get an idea of how dynamic the market is, and by conducting a comparative analysis across several pairs, you can identify the most attractive trading instrument.
For example, if the EUR/USD currency pair opened at 1.3515, and by the close of the session, one euro was trading at 1.3595 US dollars, resulting in daily market volatility of +80 pips. In practice, I often use the second definition.
In the second case, we take as a basis the range of price movements, that is, its lowest and highest values on a certain time frame.
For example, let's take the EUR/USD currency pair again. During the day, its value dropped to 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 trade. For example, the spread for the selected currency pair is 20 pips, and the average daily market volatility is only 10 pips. Therefore, the trade 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 the total market volatility allows you to evaluate the dynamics and correctly choose 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 a particular asset; in this case, volatility is indicated in relation to the initial value as a percentage of possible changes.
For example, over the course of a year, the value of the euro in US dollars changed by +12% and -8%, meaning that the annual figure in this case is equal to 100% +12% or -8%, and the total volatility of the euro/dollar market over the year was 20%.
Low and high volatility of the stock market
Hypervolatility is simply extreme movement in an asset. Here, the distance traveled by a security is measured not in hundreds of points, but in percentages or, in exceptional cases, tens of percent.
Cryptocurrencies are currently experiencing the greatest volatility, with Bitcoin being the most striking example. Its volatility is simply enormous. In just one day, the Bitcoin/USD pair can move 10-40 percent, currently the highest among all currency pairs.
Oil futures continue to impress with their volatility. During the 2020 crisis, the price of black gold fell by more than 100% in just a few days, breaking the record previously set by Bitcoin.
While this rapid rate of change might seem to significantly expand the potential for profit on the exchange, it also significantly increases the risk of losing your deposit. Therefore, when choosing Bitcoin or oil futures as a trading asset, avoid high leverage and consider using only intraday trading strategies.
Low volatility also has its drawbacks. First and foremost, such assets are only suitable for long-term strategies, as price changes are relatively minor. Furthermore, a drop in liquidity is possible, leading to wider spreads and other broker fees.
The 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.
