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Volatility is a measure of the range of price movement over a defined period on a specific timeframe on which any calculation is performed. It may increase or decrease dependent on market conditions and aims to provide the trader with an indication as to whether the range price movement in subsequent candles/bar is likely to be large or small.
Of course, as with the majority of indicators it is a lagging measure, in that it is calculated on previous candles and therefore this should be recognised by the individual trader when considering incorporating it into their own decision-making processes relating to entry and exit.
One of the most used volatility indicators is the Average True Range (ATR), and we have discussed this previously both in past articles and Inner Circle webinars sessions. As the basis of its calculation, it uses (as a default setting) the last 14 bars of price ranges and plots an average of this on a chart.
Common uses include (along with other potential criteria):
A combination of concerns re. the continuing spread of Coronavirus and Oil pricing wars over the last fortnight, have created prolonged volatility levels not seen since the Global Financial Crisis (GFC) in 2008. Although the root causes are dramatically different, price ranges have definite similarities.
Such volatility can be seen across all time-frames and across all financial instruments, as market sentiment is flung one way and then the other, as continuing updates hit the newswires.
To give context here are a few examples (using the ATR) comparing 10th March with the previous month:
One of the first lessons that it is important to recognise as traders is that, we are trading “risk”. It is price changes that create opportunity to profit and loss account capital. Appropriate management of this is CRITICAL in all trading situations, irrespective of market volatility.
There is no doubt however that higher (and increasing) volatility means that the likelihood of a significant price move away from the current price of any instrument is increased in a shorter period of time than would be considered in the market norm (as illustrated by the figure in the table above).
As an individual investor, as part of your chosen risk management, there are some potential considerations that this heightened volatility that may be worth examining.
(Note: We are not aiming to be predictive rather, offer suggestion as to questions you could ask of your current trading actions).
There are three things we want you to take away from this article:
Disclaimer: Articles are from GO Markets analysts and contributors and are based on their independent analysis or personal experiences. Views, opinions or trading styles expressed are their own, and should not be taken as either representative of or shared by GO Markets. Advice, if any, is of a ‘general’ nature and not based on your personal objectives, financial situation or needs. Consider how appropriate the advice, if any, is to your objectives, financial situation and needs, before acting on the advice. If the advice relates to acquiring a particular financial product, you should obtain and consider the Product Disclosure Statement (PDS) and Financial Services Guide (FSG) for that product before making any decisions.