The forex market is the world’s most liquefiable money market. It entails the trading of various currencies on a global scale, with traders having the freedom to buy or sell different currencies at any time. Besides its high liquidity, the foreign exchange market is also highly volatile. The market is constantly evolving, with the value of currency pairs changing regularly.
Volatility is a double-edged sword, but it is critical when developing a Forex trading strategy since it indicates the possibility of a currency rate changing. Traders can benefit from market volatility, especially when they are trading short-term. However, increased volatility implies less assurance of making profits due to the dynamic market movements.
Suppose you want to profit from market volatility. In that case, it is beneficial to rely on popular volatility strategies and trading indicators to help you make sense of the mayhem that appears on forex charts. In this article, we look at some of the best volatility technical indicators that help evaluate trade opportunities by determining market volatility.
Bollinger Bands is a widely used technical indicator found on all charting systems. It calculates the volatility of the currency rate by computing the standard deviation and then removing and applying multiples of it to and from a moving average. The result is a spread during a high volatility period or a squeeze when volatility is low. Besides being one of the best volatility indicator tools, Bollinger Bands has numerous other applications.
Average True Range (ATR)
ATR is by far one of the best indicator tools for measuring currency market volatility. The technical indicator tools compute the average true range over several chart candle intervals. It is a helpful indicator if you quickly want to determine how large the rate changes over the last N periods in a certain period. In the financial markets, ATR determines entry levels for volatility breakouts and price fluctuation structure.
Volatility Bands are not a specific indicator. They are a variety of indicators, all of which are comparable and employ the same purposes as Bollinger Bands in their operation. Volatility Bands use various rate variability factors rather than a multiple of standard deviation, as is the case in most other indicators. Some trading platforms offer them as custom indicators, used in conjunction with other indicators.
Parabolic Stop and Reverse (PSAR)
A Parabolic Stop and Reverse (PSAR) pattern on the forex chart generates a curve with dots that emerge above or below the price dependent on the price’s trend movement. Traders can utilize variations in the location of the dots to discover trading opportunities. It signifies that trading activity produces upward momentum, resulting in a purchase opportunity when the dots switch from above the price to below the price.
On the other hand, when the dots move from below to above, it may suggest a market shift indicating a selling opportunity. This indicator can assist traders in making sense of unpredictable market conditions and identifying chart trends that may give profit opportunities.
Even though the Keltner Channel is not a built-in indicator in a trading platform, it is a popular technical indicator tool used in the forex market to gauge market volatility. It is comparable to Bollinger Bands. It forms by using a moving average of a typical price for the centerline and then subtracting and adding the moving average of the High-Low difference to and from that line to generate the bands. When volatility increases, the Keltner Channel expands wider, similar to how Bollinger Bands does.
Chaikin Volatility Oscillator
The Chaikin method is one of the least used indicator tools used to measure volatility, but that does not mean that it is not practical. The tool measures market volatility as a proportion or ratio average High-Low difference change and past High-Low difference. During prolonged high volatility periods, the Chaikin volatility oscillator shows a relatively close to zero value.
Volatility in the currency market is something no one can avoid. It can also make or break your trading activities, especially if you do not know how to read market dynamics. Once you do, you can use volatility to take advantage of the turbulence in the market without taking on too many risks.
Many traders who want to measure market volatility prefer to use simple indicator tools compared to the more complex ones. Average True Range ATR is one of the most popular indicators used in volatility because of its simplicity.