Volatility indicates the degree to which the price of an asset fluctuates over a specified period. This is a key factor in trading, as most traders earn by speculating on price changes and profiting from the resulting differences.
The greater the distance between the maximum and minimum values, and the more frequent the price swings, the higher the profit potential.
To measure volatility in the Forex market, traders use a variety of tools. The most popular indicators are already included in the standard MetaTrader 4 package.
1. CCI Indicator
2. Average True Range (ATR)
3. Bollinger Bands
To display the CCI on the chart, find it in the "Indicators" folder and drag it onto the chart with your mouse. It will open in a new window below the main price chart.
The CCI appears as a line that moves within a range crossed by three levels: 0, +100, and -100. The extreme levels are set at +300 and -300.
This Forex indicator is based on the deviation of prices from their average values. In the settings, you can choose the period and price type you want to use for tracking volatility.
How do we use CCI data? Pay attention when the line goes beyond +100 or -100. Crossing above +100 is a signal to buy, while dropping below -100 is your signal to sell.
Average True Range (ATR) is a standard Forex indicator that’s easy to find on the MetaTrader 4 platform. It shows the average range of market volatility over a given period. Like the CCI, it appears as a line in a separate window below the price chart.
High ATR values indicate increased market volatility. ATR is measured in points and typically reflects the average candle size over 14 periods.
Keep in mind that the ATR value in points will be unique for each market asset!
Here’s how you can use the ATR indicator:
1. When setting stop orders. Use the average ATR value as a reference point for intraday strategies. Typically, stops are placed at 20% of the ATR.
2. When calculating position size. When volatility rises, risks increase as well, so make sure to reduce your lot size to keep risk under control.
3. When identifying trend exhaustion. A high ATR value may indicate that the current directional movement is over. Avoid entering trades in the prevailing trend. Instead, wait for a reversal signal. If you already have an open position, this is a good time to lock in profits.
4. When coupling it with moving averages. Use ATR alongside moving averages to track new trend formations and catch them right from the start.
This Forex indicator combines three moving averages, each with a different setting period.
In essence, it lies in tracking how the distance between the bands changes. When the bands expand, it signals rising volatility in the market. At this point, it's important to pay attention to how the price behaves relative to the bands.
If, after the expansion, the price bounces down from the upper band, it’s seen as a sell signal, suggesting short positions. If the price bounces up from the lower band, it’s considered to be a buy signal, indicating opportunities for long positions.
Another handy signal comes from the narrowing of the Bollinger Bands. When the corridor narrows, it shows that volatility is decreasing and the price is consolidating. This phase often precedes a sharp spike and exit out of the range.
In this case, you should be ready to open a position, aiming toward the opposite side of the indicator’s border.
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