Market Volatility
Everyday Forex traders face up the notion of volatility, either they deal with technical factors or with fundamentals. We often hear that intraday traders prefer trading at time of high volatility as it provides them opportunities of gaining high profit, while long-term investors stay out of engaging in trading when market gets volatile as they treat it suspicious, they tend to hold on until the market tension gets subdued. Basically, some traders do not completely realize what actually volatility is and how exactly it exerts influence on trading.
From mathematical point of view volatility is one the most complicated market notions. However, it does not mean that it should be difficult to comprehend in terms of practical trading. Equity market volatility is just a simple measure of the range at which the price changes during a certain period of time. For instance, if today Dow-Jones Industrial Average appreciates by 10 points and tomorrow it drops 10 points, we would be speaking about low stock market volatility. However, if today EUR/USD surges by 200 and tomorrow we face a 200 point sharp fall, we would agree that the financial market volatility is high.
Volatility is characterized by several peculiarities, such as cyclicity, constancy and return to an average value. First it may sound unclear and difficult, however the nature of such processes is very simple.
Market volatility is cyclic
Volatility tends to move in cycles. It soars, gets its top and then it shrinks until getting a bottom, then the process repeats once again. Many traders suppose that volatility is more predictable than market price (due to cyclic nature). Thus, Forex traders develop trading models grounding on this phenomenon.
Volatility is constant
Constancy is simply a feature that helps volatility in financial markets follow from one day to another one, implying that volatility that exists in the market will probably exist tomorrow. For example, if the market is very volatile today, it will probably boast high volatility tomorrow. The same idea goes vice versa: if the market volatility is low, it will be low tomorrow. Today`s increase in volatility will probably continue tomorrow and if market volatility falls today it will continue falling tomorrow. We always look at recent market volatility.
Market volatility tends to approach to its average value
When volatility gets its top or bottom, it tries to reach its normal level. When market reaches its top in volatility, it will probably reduce to its average level. The same thing happens when volatility falls to its low. Having reached the bottom, volatility will probably rise to normal condition.
So, finally, drawing a conclusion, we can mention that volatility measures price change during a certain period of time. Average true market range provides a simple way to calculate it, using a volatility formula. Markets characterized by high degree of volatility, suggest higher levels of profit when trading with risk. The main features of volatility are cyclicity, constancy and return to its average value. These notions may help to define, which markets suggest the highest potential profit, when a big move is about to start and when a probable move will finish.
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