Volatility is what? Option volatility

The formation of a successful trader is very difficult, and therefore to obtain a stable income from currency speculation is needed more than one year of experience. The development of financial markets is the introduction into macroeconomics, the study of technical analysis and work on oneself. However, the most important is to create a trading strategy that will not work 100% if the trader does not know how to analyze and use volatility.

What is volatility?

Mastering trading, you are looking for answers to many questions, among which there is necessarily a basic one: "Volatility is what?" It determines the number of items that the price has passed for a certain time. For example, for a day, the EUR / USD quotation may rise or fall by 80-100 points - this is the size of its volatility. Being in the market, one should not be surprised at such movements: the change of this currency pair by 140 points is a change in the price of the euro against the dollar by only 1%.

The scope of fluctuations of the financial instrument being analyzed is volatility, the determination of which is important for successful trading. If this indicator is high, then the trader should understand that the probability of profit is increased in accordance with the risk. The reverse situation - when the chart shows flat, and volatility is only 5-15 points. In such conditions it is comfortable to work scalpers. With medium and high volatility it is convenient to draw trend lines and make forecasts of the movement of prices for financial instruments.

What influences volatility

The volatility of prices varies for several reasons:

• Activity of market participants. Sharp price fluctuations arise when buyers and sellers are fighting for a deal. Thus, an upward or downward trend is formed, depending on who wins in this fight.
• The output of macroeconomic statistics. In the economic calendar, the most important economic events of all developed countries are collected: the output of data on production, the labor market, changes in the interest rate. The difference between the real indicators and the projected causes a stormy reaction of traders, which justifies the increasing volatility.
• Trading session. Most transactions are concluded in the morning, when the London Stock Exchange is open - during this period, the maximum volatility of most financial instruments is observed. In the American trading session, traders are less active if there are no macroeconomic news. During the Asian and Pacific sessions volatility rises in currency pairs, in which the Japanese yen, the Australian and New Zealand dollars are present .
• The general state of the economy. All countries cooperate with each other, which leads to their influence on each other. For example, investing in the Australian dollar, you need to consider that it is very susceptible to negative changes in the Chinese economy, as these two countries are close partners. The drought may lead to the fall of the New Zealand dollar, since the economy of this state is based on the sale of agricultural products. Thus, the volatility of the currency is determined by fundamental methods that cover everything: the results of negotiations between the heads of state, the minutes of meetings of central banks, the crisis in any industry, natural disasters, and so on.

Volatility characteristics

To build a successful trading strategy, it is worthwhile examining the concept of "volatility" in detail. This is what, what characteristics it has. First, it is inherent in constancy - often volatility does not change over a long period until a really significant economic event occurs. So, by analyzing the calendar of outgoing statistics, it can be assumed that the price fluctuations of the pair EUR / USD will not change their range until the release of Nonfarm payrolls.

Secondly, volatility is cyclical - sharp fluctuations are replaced by insignificant price changes, after which again there are sharp leaps due to certain fundamental factors. Third, the volatility of an option or a currency pair often tends to average. For example, if for a pair of USD / JPY it is typical to pass 80 points per day, then to this value it will return every time after reaching new extremes.

The value of volatility

Realizing, volatility is what and how to use it in your trading, a trader can increase his chances of making a profit, as he will be more attentive to choosing the entry point to the market. Volatility helps to calculate the level of risk of the planned transaction, as it is necessary to see approximate limits for the current price movement. This gives a clear understanding of where the protective order should be, and where the position will be closed with a profit.

The trader should realize that the most volatile financial instruments give more opportunities to earn, however, the risks in such transactions are significantly increased. Beginners should choose "quiet" currency pairs in order to learn how to analyze volatility changes, to filter out market noise and false signals, after which it is already possible to make their trade tactics more aggressive.

How to calculate volatility on your own

Calculation of volatility is very simple, consider it with an example. A trader trading within a day should know how many points a price can pass for an hour and a day. To do this, he needs to analyze the history of the financial instrument in question. To simplify the procedure, he opens a weekly chart and considers the difference between the High and Low values of the last closed candle. This value should be divided by 5 to determine the number of points that the price overcame in one day. To learn the hourly volatility, the value is divided by 120 (5 * 24).

If the trader marks these statistics, he will soon be able to see a certain pattern in the volatility changes, determine the standard average range of price movement for the financial instrument used, which will greatly facilitate its work and help improve the trading strategy.

Volatility indicators

Indicators for determining the strength of volatility are standard and there is a trading terminal. The simplest option is the exponential moving averages. The further from the candles the line is, the greater the volatility of this currency pair. The moving average is Bollinger Bands. This indicator of volatility represents several lines approaching, if the indicator is low, and divergent as the range of price fluctuations increases.

The third option for calculating volatility is ATR, which uses the price difference (the current maximum and minimum) to construct its image. The larger this number, the greater the volatility. The graph of ATR illustrates not a trend, but an increase or decrease in the rate of change in prices. Each of these indicators can be adjusted, based on their own considerations, so that the analyzed data are the most accurate.

Using Volatility

In order to profit from financial markets, it is important to make good use of changes in volatility. Its increase raises not only the potential profit, but also risks. For beginners, it's best to choose currency pairs whose graphs do not illustrate sharp jumps that unambiguously knock inexperienced traders out of the market. To competently use volatility, you need to know the following:

• If the chart shows flat, and the range of price fluctuations remains unchanged for a long time, then we should expect that volatility will soon rise sharply. Carefully look through the economic calendar in order to put pending orders in time.
• The trading system should take into account changes in the behavior of the financial instrument - Stop Loss must be located outside the noise zone and taking into account the possible increase in volatility - this will eliminate the possibility that you will simply be "knocked out" of the market. For example, trading EUR against USD, carefully choose the level at which the protective order will be placed - in the range of 80 points. If the price during the London or American session has increased or fallen by a given number of points, then on that day it is no longer necessary to open a position. Also remember that the potential profit should be at least 2 times more than losses.
• With high volatility, reduce the volume of trades you open - do not risk your capital without grounds.

Correcting your trading strategy in the light of the information received, you will be able to screen out most false signals and find really good entry points to the market. Asking the question: "Volatility is what?", You should not be satisfied with the mere definition of the term. The ability to analyze and apply it in your trading is the key to increasing the income from working in financial markets.