Currency volatility or foreign exchange volatility is the uncertain fluctuation of exchange rates across the forex market globally. Volatility can result in significant gains or losses. To exploit volatility, traders should use common indicators to help them make informed trading decisions amid the unpredictability of the forex charts. Here are some effective indicators that can help a trader identify volatility when looking for trade opportunities.
1. ATR (Average True Range)
The ATR utilizes three easy calculations. A trader should deduct the prevailing day’s low from the overall day’s high to find the ATR. After that, they will need to deduct the preceding day’s close from the prevailing day’s high. Finally, the trader should deduct the prevalent day’s low from the prior days close to get three different values.
A currency pair’s ATR is the highest among the three values. The larger the number, the higher the volatility will be for that particular forex pairing. While the ATR is a straightforward calculation technique that traders can use, it comes with various limitations.
For instance, the average true range does not illustrate the movement direction for potential price fluctuation. However, it predicts the possibility of a price change. Further, the ATR is not a leading but a lagging indicator, meaning that it is slow to determine prime trade opportunities. This element is a disadvantage for traders who anticipate exploiting marketing volatility.
2. Bollinger Bands
Bollinger bands are an assessment that surpasses two basic fluctuations (approximately 95%) below and above the 20-day MA (moving average). A vast distance between the bands indicates significant market volatility for the currency at hand, while a lesser distance indicates reduced volatility.
Traders can leverage Bollinger Bands by analyzing general volatility in forex listing or through the candle’s position to any of the bands. If a candle comes close or hits a Bollinger Band, it indicates a strong retracement potential. Such an occurrence can entice traders to launch a position hoping to earn profits on that forthcoming movement.
3. Keltner Channel
The Keltner Channel evaluates price movements affiliated to the upper and lower MA (moving averages) for a foreign exchange currency pair. This indicator is a merger between the EMA (exponential moving average) and the average true range (ATR).
It is similar to the Bollinger Bands, but traders will need a different approach to utilize it appropriately. While Bollinger Bands illustrate two basic variations over the 20-day MA, the KC (Keltner channel) is narrower. Its dimension is defined by drawing a larger band than the ATR on each side of the 20-day exponential moving average.
A trader should be on the lookout for price fluctuations that hit either below or above the Keltner Channel lines. This occurrence illustrates a possibility that prices will keep on trending in a similar direction.
4. Volatility Squeeze
The volatility squeeze is a combination of the Keltner Channel and Bollinger Bands. This indicator happens when Bollinger Bands integrate inside the Keltner Channel. Usually, the Bollinger Bands perch at the surface of the Keltner Channel. However, a unification activity can draw them inside, creating a narrow path that may seem to illustrate volatility. However, the Keltner Channel offers a context that traders can leverage to interpret the narrow path as a potential leading breakout indicator in the future.
5. Parabolic Stop and Reverse
A PSAR (parabolic stop and reverse) arrangement generates a parabolic arc on the foreign exchange chart. It comes with dots that emerge below or above the price depending on the price movement trend. Forex traders can leverage shifts in the positioning of the dots to identify trade opportunities.
When the dots move from the top to below the price, their upward momentum presents a buying opportunity. Suppose they rise from below; the action will illustrate a shift that offers a selling opportunity. Traders can leverage this indicator to identify volatile conditions and determine potentially profitable chart trends.
Volatility can be a disadvantage or an advantage in foreign exchange. Its outcome in your trading venture depends on how you interpret it and the technique you use to maximize prevailing market conditions while reducing your risk. With these volatility indicators, traders can identify unpredictable situations which can result in appropriate trades that convert volatility into profitable opportunities.