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Volatility is a two-sided coin when it comes to forex trading.
On the one hand, volatility is how forex traders are able to turn a profit, based on price movement.
On the other hand, increased volatility means less certainty about the market’s movements.
Here are six indicators with a proven track record in helping traders determine volatility when assessing trade opportunities.
These are:
Bollinger Bands
Average True Range (ATR)
Keltner Channel
Parabolic Stop and Reverse
MT4 Momentum Indicator
and the Volatility Squeeze
Bollinger Bands are a measurement that goes two standard deviations above and below the 20-period moving average.
When the distance between the bands widens, it shows increased market volatility.
A smaller distance, by contrast, signals less volatility.
Traders can use the Bollinger Bands not only by assessing overall volatility for an instrument, but also by using the candle’s proximity to one of the bands.
When the candle touches or nears a Bollinger Band, it signals a strong possibility for reversal either in ranging markets or trading with the trend.
The Average True Range is a lagging indicator that looks back over a certain number of candles to calculate the price range.
The default setting on MT4 is 14 so, for example, if we use the daily chart on an instrument, we can see an average of the last 14 days of price action.
We can see for example, that the ATR on this pair was high a few months ago but low now.
This can give traders an important insight into whether certain strategies will work if, for example, they rely on either higher or lower volatility.
The Keltner Channel may look like Bollinger Bands but the upper and lower limits are based on the Average True Range, not the standard deviation.
Therefore, the band becomes narrower based on volatility and many traders find this more accurate in trending markets.
A parabolic stop and reverse is a pattern that creates a parabolic curve on the forex chart, with dots that appear above or below the candles based on the trend movement of the price.
Traders can use changes in placement of the dots to identify opportunities for trades.
When the dots switch from above the price to below, for example, it means that trading activity is generating upward momentum, resulting in a buy opportunity.
Conversely, when the dots move from below to above, it can indicate a shift that represents a sell opportunity.
This indicator can help traders make sense of volatile conditions and find chart trends that offer potential profit.
On MT4 we can use the Momentum indicator as either a line chart or a histogram.
This indicator analyses and plots the speed or rate-of-change of price and, basically, when the indicator reaches its extremes, we may watch for a reversal in price action.
The volatility squeeze is actually a combination of both the Bollinger Bands and the Keltner Channel, identifying a possible breakout opportunity for a currency pair.
When Bollinger Bands contract to a shorter distance from the 20-period moving average, and fit within the Keltner Channel, we can expect a breakout in the near future.
Volatility can be your best friend or your worst enemy in forex.
It’s all about how you understand that volatility, and how you attempt to capitalize on these market conditions while minimizing your risk.
These volatility indicators will help you get a better read on an uncertain situation, which could lead to some timely trades that turn volatility into a winning proposition.
That’s all for now. Happy trading with Valutrades and we will see you soon.
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