As a trader, we need volatility to make money. I love volatility because it means that prices are moving, which can help us to make the most amount of money. In today’s video, I’ll talk about a few of the best ways to measure market volatility.
My name is Tyson Clayton, Senior Currency Strategist for Market Traders Institute. I’m a master Forex instructor with over 20 years of experience teaching student traders how to take ultimate control over not just their finances, but their lives.
Here are my three favorite ways to measure volatility in the Forex market.
Average True Range (ATR)
Let’s say the prices over the last three periods are 100, 200 and 300. The ATR will add those up and divide by three to give me an average price of 200 (600/3 +200). We can use the ATR to plot price movement for a set period of time. So if our ATR is 200 and the price jumps to 1,000, then this tells us that the market is seeing major volatility.
Bollinger Bands are volatility bands based around a moving average. Here’s an example using the Japanese yen. The price range will be “hugged” between a band above and a band below. The Bollinger Bands will start to tighten up when there’s low volatility and then widen out when there’s high volatility. If the Bollinger Bands are bulging, you know that there’s volatility in the market and you probably have a strong opportunity for money to be made.
Moving averages are another excellent measuring tool, especially the Moving Average Convergence Divergence (MACD). The MACD takes the distance between two moving averages and it will calculate the oscillation. We can also plot something called the Signal Line along with the MACD. The signal line is essentially an average of how the MACD has been moving over a specific period of time, which will help us know when to enter and exit a trade.