VolatilityWhat Is Volatility?


  • A market is said to be volatile when an intense amount of trade causes huge and fast price movements in a short period of time.
    High volatility can lead to greater risk, but if you know how to use ityou can get better performance. As a result of strong and decisive moves you can make high gains in very short periods.
    It allows for high number of trades offering short-term profits. This may be a threat to medium/long-term trade strategies because "very volatile assets" do not allow much predictability over long periods of time.

    We technically define volatility such as the percentage rate of price variation measured within a time span.In practical terms, it measures the price velocity and helps estimate fluctuations that may occur in a short period of time.
    Its measurement takes place through standard deviation, obtained by examining the square root of the difference between the price of the asset and its average value: the higher the standard deviation, the more volatile the asset.

     

    • Volatility of the day

    The best times of volatility during the day are between 15:00 and 16:30 when the American and European stock exchanges are active at the same time, or even in the morning at the opening of the European market (London open).
    The "high volatility moments" of major significance is during the day at important news releases. The result of the forecasts can lead to significant unforeseeable fluctuation creatingrisky volatility. In another case, financial news may create a market sentiment which may result to a high level of regular volatility, allowing for great trade/investment session.

     

    • Make money with volatility

    The best way to profit from volatility opportunities is to deploy a breakouttechnique i.e. when price due to high impact of volatility breaks those key levels of support/resistance, and within a short period of time creates a strong defined movement allowing for very high gains.

     

    • Measure volatility

    Recognizing good volatility is important because it allows you to choose the favorable moment of the market. With a bit of experience, it can be measured with the naked eyes based on the simple reading of the candles of a chart. When most candles are long creating a smooth and fluid motion, it means that this is a time of optimal volatility.
    The second way of measuring it is the use of the ATR (Average True Range) indicator which is much more accurate and reliable. It allows calculating the volumes exchanged, by measuring the average length of the candles in a time period, but does not indicate any direction of the price.

Interviews

  • the Analyst's answer

    Jean Grossett - Financial analyst

    Trading during certain economic announcement such as the NFP and FOMC news can be profitable for experienced traders, which is because they are more concerned about the longer time horizons. Trading these economic indicators which usually serve as fuel to price is however not advisable for new traders, because they often approach it from lower time frame perspective, consequently suffering loss from price whiplash. Best advice to newbies is to stay out during these periods, as well as applying good principles of risk and money management.

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