Volatility: factors of influence
Volatility as an indicator of the market is one of the elements of statistics that determines its variability. It is the volatility of price indicators that becomes the main criterion for the riskiness of transactions in a particular period of time. The values of this parameter are formed within the limits of relative or absolute values calculated relative to the initial price value. Thus, for unstable financial instruments this indicator is calculated by extracting the square root from the value of the calculated time interval.
There are two kinds of volatility:
- Expected/forecasted – calculated on the basis of the current price analysis, taking into account possible risks.
- Historical/fixed – derived from calculations based on available data on the value of a financial instrument in a specific period of time.
Price volatility determines the dynamics and speed of changes in price values and is necessary to predict the market reaching certain critical values in the chosen direction. In this case, the volatility indicators are measured taking into account the standard range of deviations of price indicators – the very risks that may affect the real movement of the price.
Market volatility is traditionally calculated in terms of “pegged” to stock indices.
High volatility usually refers to significant downward and upward price movements. Low volatility does not imply significant price fluctuations and is typical of “calm” periods of the market, when trend movements are more likely to be traced horizontally.
It is also important to consider the impact of the trend on price movements. If the oscillations fall within the relative mathematical minimum – we can talk about low volatility. If they have a significant range even in the presence of a pronounced “trend” of the market – it is an indicator that the situation is unstable, and it corresponds to high volatility (variability). It is not necessary to speak about minimization of risks in the markets with high volatility – the price for them is moving rather unpredictably, and its further dynamics is difficult to predict.
Volatility and market indicators
The calculation of volatility in the technical analysis of Forex is most often made on the basis of the indicator ATR – that is, the true average range. This method assumes that price gaps are taken into account as risk factors. But it does not deny the use of such concepts as trading range and market readiness for movement. What distinguishes a high-volatile market? Active dynamics of price indicators change. Both in flute trading and trend trading, the price behavior will be similar. The only difference is that in the first case the high-volatile market will show the intensive dynamics of falling/returning to the previous values. While in the second one it will show a steady growth with insignificant periods of price rollback. As for the low-volatile market, it will change slowly in both flat and trend trading, sometimes too slowly, but this is exactly what low risk trading strategies are based on.
Indicator created specially for calculation of market volatility. Bandwidth lines in the chart are standard deviation lines located below and above the value of the moving average for the selected time period.
The narrowing of the bars on the chart indicates the formation of a low-volatile market. Expansion – on the emergence of high-volatile market trends.
Indicator, traditionally used as an analytical tool for calculating market trends. It can be used to track the average linear indices of market movements over a selected period of time. Accordingly, based on the data obtained, it is possible to track the market volatility for the period under study.