› Currency pairs volatility

Currency pairs volatility

19.09.2018, 13:55

Most of the binary options traders know well such a definition as the volatility of currency pairs. It is often said that the volatility is high when the currency markets have significant changes and in the opposite, when the markets are flat, you can hear about the low volatility. It seems that everyone understands the definition of volatility but the big question still remains about how to use it practically and how to benefit from that. This is why we decided to dedicate a whole article to the volatility.

We will start with the definition. The volatility of the price is the difference which indicates the change in a number of pips (or percentage) of the price for a given period of time, for example, per day, per week or per month. Generally speaking, the volatility is the variability.

The volatility grabs the attention of traders especially in Forex and stock exchanges because the value of a potential profit or a loss depends directly on the value of the price change in pips. However, for the Binary options trading, it is enough even one pip change to get the fully profitable deal. Does that mean that the change in the volatility might be a trading signal for binary options traders? Let’s try to figure that out with an example.

We will consider the volatility changes for currency pairs as most of the binary options traders choose this type of asset class mainly. There are seven most volatile currency pairs which are called ‘majors’ by traders. All of that pairs include the United States dollar. ‘Minor’ currency pairs are a bit less active and they have a cross-rate which includes euro, yen, pound, Australian dollar, Canadian dollar and New Zealand dollar.

Currency pairs volatility

Other currency pairs are considered as exotic and they show much fewer signals for binary options due to the low liquidity (small capital is used for trading). Exotics are often much harder to forecast as well. This allocation is not accidental as most of the worldwide international payments are made in eight currencies: USD, EUR, GBP, JPY, CHF, AUD, CAD and NZD.

Depending on the trading session, any currency pair could be more or less volatile. For example, a high volatility is traditionally noticed for Japanese Yen during the Asian trading session, Euro and Pound during the European session and dollar is traded much more active during the American session. The news is usually a huge driver for the volatility spikes in certain working hours when the reports are published. Trading session switches could be followed with indicators Clock and I-sessions.

Volatility calculator.

As we have already mentioned earlier, the volatility is measured in pips or in percentage. The exact volatility data could be received from ATR indicator, currencies heat map or a special calculator which follows the changes automatically for the last hours, days or even months. There are many different services providing the volatility calculations. ‘Mataf’ calculator can indicate several options for the volatility changes.

Average daily volatility for a chosen period of time (10 weeks as the default setting)

Currency pairs volatility

Average hourly volatility during the day

Currency pairs volatility

Average daily volatility depending on the day of the week.

Currency pairs volatility

The full 5-year chart for the volatility.

Currency pairs volatility

It is very easy to identify what time and what asset will have a higher volatility based on the information provided above. This step will definitely increase your trading profitability and the efficiency of your trading strategy. Types of the trading strategies which take in count sharp market spike are the best to use in high-volatility periods. For example, ‘Spring’ or ‘Arrow’ strategies will fit this option in the best way. Otherwise, when the markets are quiet and the volatility is comparatively low, binary options trading signals coming from oscillators could be used effectively (such as Demarker or Keltner Channel).

In addition, a potential for further currency price action could be determined with the average volatility. For example, if we know that the average change for EUR/USD in the period from 4 to 5 PM GMT is 30 pips, and the quote has already gone for 28 pips, then we would make a conclusion that the price action will be quite slow for the rest of the hour, most probably.

These are the main moments which can help using the volatility for profitable binary options trading. It is also good to notice that the methods described above are also suitable for the work with other assets such as precious metals, equities and oil.

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