Volatility is something that traders always need to keep an eye out for. It can create opportunities in the market to take advantage of price fluctuations in a certain period of time. However, it can also increase the potential risks of a trade because of the fact that the market may move in unexpected directions. Want to know how to measure volatility? There are a few indicators that can help you to determine the volatility of the market.
HOW TO MEASURE VOLATILITY: 3 USEFUL INDICATORS
Moving Average
One of the most commonly used indicators to determine the volatility in the market is the moving average. This is a simple tool that allows you to measure the average movement in the market over a given period of time.
You may want to use something like the twenty period simple moving average to see what the market has done as an average over the last 20 periods on the chart.
For example, if you were looking at a daily chart, the simple moving average would show you what the price has done over the last 20 days as an average. If the average moves considerably over the chart, this may mean that it has identified a period of particularly high volatility.
However, if the simple moving average appears to be relatively flat over time, then the market has remained relatively calm.
Bollinger Bands
Bollinger bands are an excellent way to measure volatility because that is what they were created to do.
You will look at the two lines created by Bollinger bands to see if they are contracting or expanding. A contracting set of Bollinger bands means that volatility has remained low. As the Bollinger bands expand, you are seeing an increased period of volatility in that currency.
Average True Range (ATR)
Finally, in determining how to measure volatility, we should take a look at the average true range (ATR) as an indicator of where the volatility is in the market.
Once again, just like the moving average you are looking to see if there appears to be a very high level of price movement in a given period of time or a low level of price movement.
If the average true range is falling then the volatility is also on the decline. If the average true range is rising, then volatility in this particular market is also on the rise.
Keep in mind that the average true range is an indicator that you can use to determine the volatility of the market, though not necessarily the direction of the market. It is important to keep these two ideas in mind so that you don’t place a trade based on faulty information.
Simply look at what the ATR is telling you about the average volatility in the market to decide if you want to trade during this period of time or not.
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