What is Volatility in the Forex Market?

What is Volatility？ 

Volatilityrefers to the price fluctuations of an asset. It is typically measured by the difference between the opening and closing prices over a certain interval of time. It can also be defined by how quickly prices fall or rise. 

Market volatility particularly measures how risky the investment is. The higher the volatility, the riskier a trade becomes and conversely when the volatility is lower. 

What causes Price Volatility？

Market volatility is usually caused by economic factors, interest rate changes, sentiment and fiscal policy adjustments. More recently, political developments have been a leading factor. It often reflects levels of market sentiment, so any factor that can influence investor behavior will drive market volatility. Read more on Fundamental analysis.

Main Types of Volatility

There are several types that include: 

Historical Volatility: It measures the historical price fluctuations, usually over the last 12 months. The asset is considered more volatile and riskier when the price is more deviated from its own average. However, this type normally does not provide insights about the future trend or direction of the price.

Implied Volatility: It is predicting the future prices by evaluating options prices variations. Rising option prices indicate increasing volatility, and vice versa. It is also known as future volatility. 

Market Volatility: It is how fast prices change in a specific market, and is characterized by high levels of uncertainties.

How to Predict a Volatile Market？

Average True Range: This indicator calculates the true range of prices that are generated as a 14-day moving average. The true range is the highest value of one of the following three equations:

• True Range = Current day‘s high – current day’s low

• True Range = Current day‘s high – previous day’s close

• True Range = Previous days close – current day´s low