All over the internet you can read different things about volatility and how to trade during volatility. Occasionally, traders ask me "What is volatility trading? Is there any volatility trading strategy? What kind of Forex volatility system to use? Do you have Forex volatility index indicator?" – and many other things connected to volatility analysis in Forex.
So let me first explain what volatility is and then, I will try to answer all of your questions.
Volatility is a measure of the degree of change in the value of a currency, currency pair or the Forex market as a whole. Volatility is most commonly referenced when a currency has seen sharp changes in value compared to many of the other currencies in the market.
Volatility is used in two main ways:
Low volatility means that there is little or no change in value over a specific period of time.
High volatility means that values have varied significantly over a specific period of time.
Medium volatility is sometimes used to refer to a state between low volatility and high volatility. A volatile market is one that exhibits rapid fluctuations in price. A non-volatile or stable market has moderate price fluctuations.
Good news is that we traders can trade both on low and high volatility. I will explain six good reasons to trade with volatility.
High volatility trading
As you could see from the video above high volatility is used to profit on fast price fluctuations and changes that happen when market gains a momentum surge. There are different indicators in Forex volatility based trading but I personally prefer the marubozu trading method explained in the video.
Volatility has been shown to be a mean-reverting asset class. What does that mean? When volatility is higher than average, it's expected to come down. When volatility is lower than average, it's expected to move up. In other words, volatility moves towards the average.
Price always wants to be in equilibrium. Once it gets out of equilibrium, it tends to correct towards the mean. After volatile periods there will be a consolidation. Traders use the consolidation time to re evaluate the positions and position along the main trend
Scalping On Volatility – Intermarket Correlation
The USD/JPY volatility benefits from an impressive topside acceleration caused by election of new president Trump. But the yen depreciation should be more gradual as BoJ won't act, while US rates have picked up post the US election and following the Fed's adjustment higher of the dot plot. One more reason to scalp on high volatility is the intermarket correlation.
In contrast, Nikkei volatility remains on its lows. Once Nikkei start reverting to its means, the correlation will again be more pronounced and traders could benefit from scalping on volatility during Asia session, when Nikkei is the strongest. Even if volatility is, low there is a low volatility trading strategy that can be used during calm period.
Effective Volatility Indicators
One of the reasons that people like to use high volatility trading approach on high volatility Forex pairs such as USD/JPY, GBP/JPY, GBP/NZD, GBP/USD and others is that volatility indicators are very effective.
Using VPS tool
Effective technical analysis that I provide each day can be complemented with a great tool named Volatility Protection. The tool can be enabled in the Trader's Room for Trade.MT4, Zero.MT4 and Trade.MT5 accounts (either live or demo). If a market starts to be volatile, the tool can help you avoid big losses.
Key features of Volatility Protection Settings:
- Traders can limit maximum price slippage on different market and stop orders.
Losses by pending orders falling into price gaps might be limited or fully avoided.
- By enabling the partial fills and allowing to fill your orders part by part, you might get filled on larger orders.
- The ability to execute limit orders and take-profits even on instant price spikes by transmitting them as market orders.
- The possibility to avoid order activation due to spread widening, when there's no actual movement in market.
The explosion in the popularity of volatility trading might be well-used in Forex and equities markets, so use the opportunity to trade it and grab more pips then usual. You can join our free live trading webinars where we try to find setups and enjoy the volatility based trading.
How do you find volatility trading? Do you enjoy trading it and do you need any help? Feel free to comment in the section below.
Cheers and trade safe,