Over the years, volatility has become a prevalent indicator across numerous markets. Many traders see it as a way of gauging market maturity or immaturity. Strictly speaking, volatility refers to how much the price of an asset moves up and down during a given time frame. It can be calculated in any other unit of measure so long as you are consistent throughout your calculations.
What are Forex Volatility Technical Indicators?
In the world of trading, there are many strategies that you can use to get a good return on your investment. Two popular ways retail forex traders get a significant amount of their returns are by selling or buying options and taking advantage of high volatility markets. One way you can take advantage of high volatility markets is by using Forex volatility technical indicators.
A Forex volatility technical indicator is designed to help you gauge how volatile an asset price will be in terms of range, speed and direction over time.
Ways to calculate volatility
Keep in mind that different types of Forex traders look for different things when it comes to volatility.
Average True Range
The actual average range is the simple moving average of individual period actual ranges over a fixed number of periods. This measures how much movement to expect for a given instrument on any single day. You can also use this to identify breakouts by looking at two days’ worth of true average ranges.
Bollinger Bands
The upper and lower bands are two standard deviations away from the 20-period simple moving average. This band-based approach is extremely popular because it forecasts volatility based on recent price history. You can also use three or five standard deviation settings to forecast higher or lower levels of volatility, respectively. You can then identify breakouts using these techniques as well.
Money Flow Index
We have previously discussed the MFI, which represents money flowing into and out of a market during a given period. The best results are achieved when looking at both the raw data and the “flow” version, wherein the positive flow is above zero, and the negative flow is below zero. You can then use a crossover of these two figures to identify breakouts or reversals.
On Balance Volume
OBV is a running total of volume, which is positive on days the price closes higher and harmful on days it closes lower. You can then form signals based on changes in direction as well as line breaks. For more information, please see our articles covering OBV and how to combine it with other indicators for better results.
RSI
RSI calculates gains over a given period minus losses over the same period. The idea is that when your overnight gains are high, it follows thus that volatility will be high in much the same way.
Stochastics
One similar indicator which you can use to forecast potential changes in volatility is stochastics. You calculate daily highs, fewer lows over a given number of periods and then plot this against the price action itself. Divergences towards lower lows, for instance, can give you valuable early warnings about declines in volatility, while positive divergences could suggest increasing odds of upward movements instead.
Volatility Breakouts
These occur when prices break above or below critical levels (usually moving averages), suggesting higher or lower price action levels, respectively.
Volatility Claws
Often, price movements themselves are what signal changes in volatility. For instance, do you remember how prices gapped higher in February 2014 when the Swiss National Bank unpegged the franc from its euro peg? You can use these sorts of breaks to your advantage by identifying breakouts that could foreshadow increased or decreased volatility in much the same way.
Summary
When using forex volatility technical indicators, remember that they need to be used wisely and not alone. It would be best to combine them with other forms of analysis to get a clearer picture of what’s going on in the markets. Reach out to reputable online brokers Saxo Bank, which offers low commissions and excellent customer service.
