Translated from Russian by Google Translate
24 Сентябрь 2008

All you need to know about volatility

Today’s article is devoted to research a very important features of the market mechanism. Have you noticed ever in the trade that the fluctuation of one currency pair, say, EUR / USD, is much lower price range than the variation, for example, a pair GBP / JPY. Although if we take into account certain time slots, we can see that often, and a pair of EUR / USD that explodes, after which the price fluctuation simply shocking. This is due to various factors, but nevertheless, fundamental - it is a fundamental factor. It takes into account the way of news, major operations by various market institutions, etc. But if we compare the regular conduct of a currency pair in comparison with another currency pair, we can see that the average value of the price range, which varies in price compared currency pairs, significantly different. This phenomenon is called in terminology trading volatility.


Let us explain more professionally, that is the same volatility.

First, volatility is a definite figure. It shows the distance between the maximum and minimum prices for a given period of time. Basically, taking into account the average volatility, but depending on the approach to trade, may be taken into account and other time slots, for example, day, week and year. The annual volatility also plays an important. It can be seen as a general informative source that describe the overall picture of conduct of a currency pair. But in general, the annual volatility of a particular currency pair gives the required information, because, in our view, the rate for a longer time interval deserves greater confidence of the analyst.

Secondly, the volatility characterizes the volatility of the price range applies to a particular currency pair in the interval.

And now try to summarize all the above and give the definition of volatility. Volatility - an indicator that characterizes the changing trend of the price range for a certain period of time. Volatility is a critical factor in calculating risks and managing financial assets. The amount of volatility could be viewed as a percentage, and the amount of currency.

The calculation is as follows: take some time, after which the calculated average of the prices during this interval. And from the average value calculated the value of currency fluctuations pairs, which in turn is the volatility. This value fluctuations can be expressed in monetary terms, for example, ± 10 or $ percentage - ± 10%. Here, actually, the whole mathematics.

Certainly, in terms of earnings, volatility is a very good assistant trader. But do not forget that many foreign couples who have a high volatility, significantly increases the risk of making a profit, either reset the account. In treyderskih circles even walk title, initially by for currency pairs with high volatility - «killers deposits». But this is just for information.

In our view, use the volatility of the market for profit useful when working on short time intervals, for example, time schedules, where the trader had no time to wait for heavy traffic, a strong currency fluctuation makes it possible to make a profit in a short period of time. There are good and bad. It is believed that the long-term trade more profitable as it is more profitable than short-term. If you look at the foreign exchange markets more globally, it can be concluded that they are liquid than the same stock markets. Securities are sometimes able to make great leaps in the event of any force majeure situations (enough to recall the events of autumn 2008), but if you consider the high frequency vibrations, the foreign exchange markets, and in particular the Forex market in this area has a clear advantage before the stock market.

The structure of volatility can be described as follows:

1. Universal volatility. A mostly at long intervals of time to get a clearer picture of the fluctuations in the value of a currency pair. Intervals: week, month, year.

2. Volatility for a certain period of time. Typically, in the calculation of a short interval of time. The strength of the movement at a time interval may be much stronger than the strength of the global (universal) volatility. The volume of transactions at this period is much smaller. With respect to volume, it is worth noting that the higher the volatility, so, consequently, higher volume of transactions. In technical analysis to determine the volume of transactions used indicator On Balance Volume.

Immediately specifying lack of an indicator. It shows the volume of transactions, but does not determine in what proportions committed transactions in the market. Graphic indicators presented in the form of studs. When the indicator rising, it said that substantial funds enter the market, or that there is a significant imbalance of supply and demand, with a predominance of one of them. Therefore, in these moments market begins a strong movement in either direction, resulting in a changing and indicator.

3. Balanced volatility. Such volatility is characterized by uneven traffic in one direction. For example, if the trend according to daily schedule - ascending, the shorter time intervals, we can see how the price makes uniform steps in the direction of the selected developments. Balanced volatility seen mostly on short time intervals. That is its main feature. Analysis of shorter time interval will reflect the volatility aimed at stabilizing the current trend to a long interval of the same currency pair. Thus, one can conclude that the increased volume of transactions reflects the increasing volatility, and volatility in turn is under the direction of the current trend by increasing or falling prices.