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 exchange rate dynamics and can be expressed in both relative (percentage) and real (points) values.
There are numerous ways to calculate volatility, but we will focus on the simplest, which is most interesting to traders.
The initial data for the 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. During one session, the rate peaked at 1.3460 and fell to 1.3310. This means the maximum increase was 100 points, and the maximum decline was 50 points. Expressing these indicators in relative terms would yield +0.007% and -0.0035%, respectively.
Theoretically, this means that opening a buy trade at the beginning of the trading session could yield a profit of 100 pips, while opening a sell trade could yield a profit of 50 pips. However, this is only theoretical, as trend movements have more complex dynamics. Nevertheless, this type of volatility in Forex can be used to select the most dynamic trading instrument.
Both the given volatility and the full price range can be compared, in which case the distance between the minimum and maximum is taken into account. In our case, the full volatility for EUR/USD would be 150 pips over one trading session.
Furthermore, when opening trades, it's a good idea to estimate the likely volatility of the Forex market. In addition to historical data, calculations will be based on parameters such as the possible release of important news, the trade opening time, and the current market situation.
For example, the projected market volatility will definitely be higher than usual if there is a persistent upward trend in demand for the base currency in the currency pair, while the quoted currency is steadily moving downward. In this case, if the price change usually does not exceed 100 points per day, in the current situation one can hope for a higher figure.
Why is it necessary to calculate Forex volatility?
First and foremost, it's used to assess potential profit and risk levels, as well as to correctly set stop orders. This is especially true for the take-profit order value, since if the exchange rate hasn't changed more than 70 pips in a day for a month, setting a take-profit higher than this value during intraday trading doesn't make sense.
When choosing a currency pair, the more pips the chosen trading instrument moves during a trading session, the higher the trader's earnings. However, beginners are advised not to trade the most volatile forex instruments.
When assessing risk, if the price exceeds a certain number of pips over a given period, this indicator will serve as a benchmark for calculating potential losses and the likelihood of losing the entire deposit. It will also help when setting a stop-loss order .
