The term volatility is used to refer to price fluctuations over a specified period. In short, high volatility means that prices make large fluctuations. Conversely, low volatility means that prices make small fluctuations.
Volatility is determined by taking a look at chart indicators, namely moving averages or Bollinger Bands. On top of that, the VIX or volatility index can be used to estimate future volatility. The VIX is calculated by using the S&P 500 options implied volatility for 30 days. This shows how market participants are expecting price volatility to fare in the coming trading days. A high VIX shows that theres a lot of uncertainty and that more volatility is likely while a low VIX means that market price action is expected to be more stable.
It is important to look at volatility because it can affect your trade performance. Better yet, it can remind you to make adjustments in your trade style if necessary.
You can start by looking at changes in the average price action of the currency pairs that you trade. For example, you can observe how many pips EUR/USD moves for a day. A volatile trading day could have the pair fluctuating by as much as 150 pips on a single day while low market volatility can keep its moves to just around 50 pips per day.
For instance, if EUR/USD's average intraday movement shifts from 50 to 100 pips, you might be better off widening your stop on day trades. In addition, if you notice that price tends to reverse within the day or erase most of its gains or losses, you can adjust your profit targets lower or hold on to trades for a shorter time frame.
Volatility in the market is also treated as a gauge of fear and uncertainty. This means that price action is extra sensitive to economic data or market updates. During these moments, its likely that even a small piece of economic data could have a big and lasting effect on price movement.
As a result, you might also want to consider being more conscious of upcoming economic reports and potential market movers. If you are expecting a report to have a material effect on price movement, you can lock in profits early or move your stop to entry to prevent sudden price spikes from resulting in a large loss to your account. Even though market environment can be unpredictable, you are still in control of your account when you practice proper risk management.
Volatility is determined by taking a look at chart indicators, namely moving averages or Bollinger Bands. On top of that, the VIX or volatility index can be used to estimate future volatility. The VIX is calculated by using the S&P 500 options implied volatility for 30 days. This shows how market participants are expecting price volatility to fare in the coming trading days. A high VIX shows that theres a lot of uncertainty and that more volatility is likely while a low VIX means that market price action is expected to be more stable.
It is important to look at volatility because it can affect your trade performance. Better yet, it can remind you to make adjustments in your trade style if necessary.
You can start by looking at changes in the average price action of the currency pairs that you trade. For example, you can observe how many pips EUR/USD moves for a day. A volatile trading day could have the pair fluctuating by as much as 150 pips on a single day while low market volatility can keep its moves to just around 50 pips per day.
For instance, if EUR/USD's average intraday movement shifts from 50 to 100 pips, you might be better off widening your stop on day trades. In addition, if you notice that price tends to reverse within the day or erase most of its gains or losses, you can adjust your profit targets lower or hold on to trades for a shorter time frame.
Volatility in the market is also treated as a gauge of fear and uncertainty. This means that price action is extra sensitive to economic data or market updates. During these moments, its likely that even a small piece of economic data could have a big and lasting effect on price movement.
As a result, you might also want to consider being more conscious of upcoming economic reports and potential market movers. If you are expecting a report to have a material effect on price movement, you can lock in profits early or move your stop to entry to prevent sudden price spikes from resulting in a large loss to your account. Even though market environment can be unpredictable, you are still in control of your account when you practice proper risk management.
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