Understanding price volatility is one of the building blocks of technical knowledge in the Forex market. This concept involves comparing the prices of two assets and determining the amount of change that has occurred.
Assets with high volatility show rapid price changes, and those with low volatility have slower price movements. However, price volatility does not always indicate a rise or a fall in the price. Volatility can also be measured by using technical indicators, which are used in the trading process.
Among the technical indicators used to measure volatility in the Forex market is ATR or Average True Range. The ATR is a measure of price movement relative to a moving average. It is similar to Bollinger Bands, which measures price movement as two standard deviations above the 20-day moving average.
Volatility trading is an effective way to find profitable trading opportunities in the market. Volatility traders look for large price movements in either direction. It is often the case after important market reports, especially when the published number is not in line with market expectations. Volatility can also indicate the potential risks associated with trading currency pairs. Understanding how volatility works can help you become a better trader.
Can Volatility Be Your Friend?
Volatility is both your friend and your enemy in the Forex market. As a trader, you must learn how to manage volatility effectively to minimize risk. By understanding volatility and using indicators to predict price movements, you’ll be better prepared to trade at the right time. As always, keep in mind that this information is intended for educational purposes only and is not intended to be investment advice.
Both domestic and international shocks cause volatility in the Forex market. Trade wars and tariffs affect currencies and decrease their value. Furthermore, prolonged uncertainty can negatively affect traders.