Forex volatility

Any trader who chooses the most profitable trading instrument encounters the concept of “Forex volatility”. It is by this indicator that one can assess the prospects for making a profit over a certain period for a currency pair or other trading instrument.

Forex volatility is an indicator of price (rate) changes over a certain time period (trading session, day, week, month).

In other words, this term characterizes the dynamics of the exchange rate and can be expressed both in relative (percentage) and real (points) values.

There are many options for calculating volatility, but we will focus only on the simplest one, which is most interesting for a trader.

The initial data for calculations will be the price at the beginning of the period and the minimum and maximum points.

For example, trading on the EUR/USD currency pair opened at 1.3360, the maximum rate during one session rose to 1.3460 and fell to 1.3310.

That is, the maximum growth was 100 points, and the maximum fall was 50 points. If we express these indicators in relative terms, we get +0.007% and -0.0035%, respectively. Theoretically, this means that by opening a buy trade at the beginning of the trading session, we could make a profit of 100 points, and when opening a sell trade, 50. But this is only theoretical, since trend movement has more complex dynamics.

But still, this option of volatility in Forex can be used to select the most dynamic trading instrument. In this case, you can compare both the given volatility option and the full range of price movement; in this case, the distance between the minimum and maximum is taken into account; in our case, the value of the full volatility for EUR/USD will be 150 points per trading session.

In addition, when opening transactions, it will not be superfluous to assess the likely volatility of Forex; calculations, in addition to historical data, will also be based on such parameters as the possible release of important news, the time of opening a transaction, the current situation on the market.

For example, the forecast market volatility will definitely be higher than usual if there is a persistent tendency on the exchange to increase demand for the base currency in a currency pair, and the rate of the quoted currency is invariably moving down. In this case, if usually the price change per day does not exceed more than 100 points, in the current situation one can hope for a higher figure.

Why do you need to calculate Forex volatility?

First of all, to assess the possible profit and risk level, as well as to correctly set stop orders. This is especially true for the value of a take profit order, because if over the course of a month the rate has not changed by more than 70 points per day, then when carrying out intraday trading it makes no sense to set a take profit greater than this value.

When choosing a currency pair, the more points the selected trading instrument passes during a trading session, the higher the trader’s earnings.

True, novice players are not recommended to work with the most volatile forex instruments. When assessing risk - if over a certain period the price exceeds a certain number of points as much as possible, this indicator will serve as a guideline when calculating possible losses and the probability of complete loss of the deposit. It will also help when placing a stop loss order .