One of the terms often used to describe the state of the forex market is volatility, which is the measure of how drastic the prices change. Forex market liquidity plays the most significant role in influencing the market prices volatility. When liquidity is low, the market becomes more volatile, causing a drastic change in prices.
When liquidity is high, volatility in the market is low with a less drastic market price fluctuation. Traders use market volatility to turn profits because it enables them to know about the price movements in the market. Using volatility indicators helps to make sense of the market volatility and capitalise on the finding to turn profits.
In this article, we look at some of the most popular indicators that traders use because of their proven record of accomplishment and efficient results.
4 Volatility Indicators
- Bollinger Bands
Bollinger Bands are some of the most commonly used, potent, reliable, and trusted volatility indicators in forex trading. Traders use them during the range moments to time entries and to read the strength of the trend. Furthermore, they also identify market tops to turn profits by using the indicators.
The Bollinger indicator adjusts to the current market situation and real-time price action by taking advantage of volatility. The bands, plotted in two standard deviations above and below the moving average or the market price, expand when the trends are strong with price fluctuations and contract during the downward momentum trends and sideways consolidations.
Besides using Bollinger Bands by assessing the market volatility, traders can also use candlesticks to cash in on the market volatility. When the candlesticks near or touch the Bollinger Band, it signals a retracement possibility, which may tempt traders to open positions hoping to turn profits.
- Parabolic Stop and Reverse (PSAR)
Another volatility indicator that many traders use on the forex charts is the PSAR-Parabolic Stop and Reverse, creating a parabolic curve pattern. The pattern appears as dots set above or below the market price. Traders use placement changes of the dots to identify trade opportunities.
If the dots move from above to below the price, the traders get a buying opportunity because the trading activity generates upward momentum. If the dots move from below to above the price, it indicates a shift and a selling opportunity. The indicator helps forex traders to make potential profits by making sense of the volatile conditions and chart trends.
- Average True Range (ATR)
The average true range or ATR is a lagging indicator that uses three calculations to determine the price movement and market volatility. In ATR calculation, you take the current-day trading lows and subtract them from the day’s recent high. You then take the previous days and subtract them from the high of the current day.
The last part of the calculation is to subtract the present day’s low from the close of the previous day, ending up with three different values. The highest value of the three values is the ATR of the currency pair and volatility for the currency pairing. Even though the simple calculation is popular among many forex traders, it does not indicate the price movement, making it harder to identify a price swing.
- Keltner Channel
The Keltner Channel is not as popular as the Bollinger Bands, but it is an effective indicator used by traders to analyse the price movements to turn profits. The indicator, which is a combination of exponential moving average and ATR, uses a drawing band that shows price deviations on either side of the standard 20-day moving average.
Price movements can break above or below the indicator lines, indicating that the prices might continue trending in the same direction. The impending volatility offers a chance to the traders to make quick profits.
Wrapping it up
Volatility is a forex trader’s best trading friend or worst enemy, depending on their level of understanding. It is something you cannot understand without the use of indicators to help you. Once you learn how to interpret the patterns, it gets easier to capitalise on the conditions in the market to turn profits without risking too much.
They also help you get better reads on the uncertain market situations that could lead to winning propositions from market volatility. There are other volatility indicators besides the ones named above, but they all play the same roles.