How to measure volatility in forex?
he easiest and most straightforward way to assess volatility is to look at the chart and see whether fluctuations are now bigger or smaller than they were before. For more precise measures of market volatility, you can look at certain indicators such as the average true range (ATR) and the Bollinger bands.
The ATR measures volatility in a specific period (1h, 4h, 1w, etc.) by simply measuring the range of motion of the price. If the price had moved 90 pips within a day in EURUSD for example, then the ATR will show a reading of 0.0090 (or 0.009).
The Bollinger bands measure also volatility but in a different way. The Bollinger bands indicator usually measures the deviation of the price from a specific mean. For example, the default settings for Bollinger bands use the 20-period moving average, and 2 standard deviations from that mean. When you see the price moving extensively outside of the two Bollinger bands, then you can be confident that the price is having volatility that is higher than 2 standard deviations. You can change the Bollinger bands settings to see which ones are the best fit.
In addition to the above, people usually refer to the VIX index as a measure of volatility. But while the VIX is indeed a measure of volatility, it measures the volatility of SPX futures, rather than the volatility of forex pairs. In other words, the VIX index measures the volatility of equities rather than currencies – although the volatility of equities reflects on some currency pairs.
The ATR measures volatility in a specific period (1h, 4h, 1w, etc.) by simply measuring the range of motion of the price. If the price had moved 90 pips within a day in EURUSD for example, then the ATR will show a reading of 0.0090 (or 0.009).
The Bollinger bands measure also volatility but in a different way. The Bollinger bands indicator usually measures the deviation of the price from a specific mean. For example, the default settings for Bollinger bands use the 20-period moving average, and 2 standard deviations from that mean. When you see the price moving extensively outside of the two Bollinger bands, then you can be confident that the price is having volatility that is higher than 2 standard deviations. You can change the Bollinger bands settings to see which ones are the best fit.
In addition to the above, people usually refer to the VIX index as a measure of volatility. But while the VIX is indeed a measure of volatility, it measures the volatility of SPX futures, rather than the volatility of forex pairs. In other words, the VIX index measures the volatility of equities rather than currencies – although the volatility of equities reflects on some currency pairs.