Some Best Volatility Indicators You Can Use in Your Forex Trading

Some Best Volatility Indicators You Can Use in Your Forex Trading

Volatility has both positive and negative aspects when it comes to forex trading. On one side, it increases the amount of profits the traders take home, especially in short-term trading; on the other hand, it also depicts that the market’s movements are not so certain. While making trades according to their best understanding of the market movements, it often happens that traders get caught up by market volatility. It simply suggests a situation where the market prices are not moving in the direction you expected. 

Thus, if you want to make the best of market volatility, you must use some of the best volatility indicators, which can help you understand the forex chaos in a much better way. Continue reading to learn about the best indicators with an excellent track record of assisting traders in determining the volatility of various trading opportunities.

1. Bollinger Bands:

Many traders use Bollinger Bands in order to measure the volatility of the forex listing; when there is a widened distance between the bands, it represents high volatility for a particular currency. On the contrary, if the distance is small, there is less volatility.

Pros:

  • It can be adjusted up to three standard deviations over a longer time period.

Cons:

  • Just like any other technical indicator, Bollinger Bands hugely depend upon the historical data, which sometimes turns out to be irrelevant as the volatility is highly impacted by recent events rather than past happenings.

2. Average True Range:

ATR takes into consideration the following three things:

  • Current day’s high- Current day’s low
  • Current day’s high-Previous day’s close
  • Previous day’s close-Current day’s low

Thus, you will end up having three different values; ATR will be the highest one of all. Also, the larger the number, the higher the volatility for the currency pair.

Pros:

  • Easy to learn for beginners.
  • Can also be used to set “Stop Loss”.

Cons:

  • It just tells you about the likelihood of the movement rather than depicting the direction of the movement.
  • It’s more of a lagging indicator instead of a leading one which is not something you want to use if you are thinking of capitalizing on market volatility. 

3. Keltner Channel:

The Keltner Channel is a kind of indicator that analyses the price movements corresponding to the moving average of the currency pair. It’s actually a result of both ATR and the EMA (exponential moving average). It is also considered similar to the Bollinger Bands. However, it uses a different approach to determine market volatility. Here the traders have to keep an eye on the price movements that break above or below the lines, indicating a possibility of prices continuing to trend in the same direction and offering quick profits on approaching volatility.

Pros:

  • Even if the price activity does not reach the Keltner Channel limits, a declining activity still signifies declining volatility. 

Cons:

  • Compared to other indicators, Keltner Channel is considered much slower for identifying market volatility. 

4. Parabolic Stop And Reverse:

PSAR is an indicator that forms a parabolic on the forex chart in a dotted pattern appearing above or below the price on the basis of the current price trend. Traders can identify the volatility based on changes in these dots’ placement. If the dots switch from below to above, it indicates a sell opportunity and vice versa. Many traders use this indicator to get an idea of various volatile conditions to generate a potential amount of profit.

Pros:

  • It depicts everything in visual form, making it easy to understand.

Cons:

  • Sometimes, PSAR changes indications so often that traders cannot make use of it to gauge volatility. 

5. Momentum Indicator:

If you use the MT4 trading platform, you can take advantage of an in-built indicator known as a momentum indicator that analyzes the speed of price movements in numerical figures. If the number turns out to be positive, it indicates a stronger upward trend for the currency pair (buy opportunity) and vice versa.

Pros:

  • The indicator is handy in pinpointing the highs and lows of an extremely volatile forex pair.

Cons:

  • The indicator sometimes generates many false signals.

Conclusion:

While trading forex, volatility can be your best friend or worst enemy, depending on how you deal with it. Thus, the above indicators can help you make timely decisions to take the best advantage of volatility and turn it in your favor.

Some Best Volatility Indicators You Can Use in Your Forex Trading

by erikatyler time to read: 3 min
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