When market participants talk about volatility, they are referring to the change in average price fluctuations for a particular time period. Simply put, volatile trading days means that there are larger price movements for the day or week compared to times when the market is said to be less volatile.
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.
High volatility can have a material effect on your trading and necessary adjustments must be made in order to weather potential spikes in price action.
A good way to start is to take a look at how the average movement of a particular pair has changed in the past few days compared to other periods. For instance, GBP/USD could be moving at 50 pips a day during less volatile days but could fluctuate by as much as 100 pips a day for more volatile market days.
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 is also considered as a measure of market uncertainty and fear. High volatility suggests that price action reacts more to market data and events. During these periods, a low-tier economic release could still have a large and pronounced effect on price action as traders react more to it.
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.
High volatility can have a material effect on your trading and necessary adjustments must be made in order to weather potential spikes in price action.
A good way to start is to take a look at how the average movement of a particular pair has changed in the past few days compared to other periods. For instance, GBP/USD could be moving at 50 pips a day during less volatile days but could fluctuate by as much as 100 pips a day for more volatile market days.
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 is also considered as a measure of market uncertainty and fear. High volatility suggests that price action reacts more to market data and events. During these periods, a low-tier economic release could still have a large and pronounced effect on price action as traders react more to it.
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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