Volatility as an indicator of the market is one of the elements of statistics that determine its volatility. It is the volatility of price indicators that becomes the main criterion for the riskiness of transactions in a specific period of time. The values of this parameter are formed within the framework of relative or absolute values calculated relative to the initial price value. So, for unstable financial instruments, this indicator is calculated by extracting the square root of the indicator value of the estimated time interval.
There are two types of volatility:
- Expected/forecasted – calculated on the basis of the analysis of the current price, taking into account possible risks.
- Historical / fixed – obtained from calculations based on available data on the value of a financial instrument in a specific period of time.
Price volatility determines the dynamics and speed of changes in price values and is necessary for predicting that the market will reach certain critical values in a selected direction. Moreover, volatility indicators, in this case, are measured taking into account the standard range of deviations of price indicators – the very risks that can affect the real price movement.
Market volatility is traditionally calculated in terms of stock market indices.
High volatility indicators usually mean significant price fluctuations in the direction of falling and rising. Low volatility does not imply significant price changes and is characteristic of “calm” periods of the market when trend movements are traced more likely in the horizontal plane.
It is important to take into account such a factor as the influence of a trend on price movements. If the fluctuations fit into the relative mathematical minimum – we can talk about low volatility. If they have a significant range, even if there is a pronounced “trend” in the market, this is an indicator that the situation is unstable, and high volatility (variability) corresponds to it. There is no need to talk about minimizing risks in markets with high volatility – the price of them moves quite unpredictably, and its further dynamics are quite difficult to predict.
Volatility and market indicators
The calculation of volatility in Forex technical analysis is most often based on the ATR indicator – that is, the true average range. This method involves the consideration of price gaps as risk factors. But it does not deny the use of concepts such as the trading range and market readiness for movement. What makes the high volatility market different? Active dynamics of changes in price indicators. Both in flat trading and in trend trading price behavior will be similar. The only difference is that in the first case, the highly volatile market will display intensive dynamics of falling / returning to previous values. Whereas in the second it will show steady growth with insignificant periods of price rollback. As for the low-volatility market, it will change slowly in flat trading and trend trading, sometimes too slowly, but this is where low-risk trading strategies are built.
An indicator created specifically for calculating market volatility. Lines of stripes on the chart are a display of lines of standard deviations located below and above the value of the moving average for the selected time period taken as the basis.
The narrowing of the indicator bands on the chart indicates the formation of a low volatility market. The expansion is about the emergence of highly volatile market trends.
An indicator traditionally used as an analytical tool for calculating market trends. With it, you can track the average linear indicators of market movements for a selected period of time. Accordingly, based on the data obtained, it is possible to track market volatility for the studied period of time.