Volume / Volatility
With stock or futures trades, volume is essential for making good breakout trades, so not having this data in the forex leaves us at a disadvantage. Because of this disadvantage, we have to rely on sound risk management and specific criteria to position ourselves for an excellent potential breakout. If there is a significant price movement within a short time, then volatility would be considered high.
On the other hand, if there is relatively little movement in a short period, then volatility would be considered low. While it’s tempting to get into the market when it is moving faster than a speeding bullet, you will often find yourself more stressed and anxious, making bad decisions as your money goes in and back out.
This high volatility attracts many forex traders, but it’s this same volatility that kills a lot of them as well. The goal here is to use volatility to your advantage.
We can use volatility when looking for good breakout trade opportunities. Volatility measures the overall price fluctuations over a particular time, and this information can be used to detect potential breakouts. A few indicators can help you gauge a pair’s current
Moving averages are probably the most common indicator used by forex traders, and although it is a simple tool, it provides invaluable data. Moving averages measure the average movement of the market for an X amount of time, where X is whatever you want it to be. For example, applying a 20 SMA to a daily chart would show you the average movement for the past 20 days.
Bollinger Bands are excellent tools for measuring volatility because that is precisely what it was designed to do. Bollinger Bands are 2 lines plotted 2 standard deviations above and below a moving average for an X amount of time, where X is whatever you want it to be. So, if we set it at 20, we would have a 20 SMA and two other lines. One line would be plotted +2 standard deviations above it, and the other would be plotted -2 standard deviations below.
When the bands contract, it tells us that volatility is LOW. When the bands widen, it tells us that volatility is HIGH.
Average True Range
Last on the list is the Average True Range, or ATR. The ATR is an excellent tool for measuring volatility because it tells us the average trading range of the market for X amount of time, where X is whatever you want it to be. ATR takes the currency pair’s range, the distance between the high and low in the time frame under study, and then plots that measurement as a moving average. So, setting ATR to “20” on a daily chart would show you the average trading range for the past 20 days.
When ATR is falling, it is an indication that volatility is decreasing. When ATR is rising, it indicates that volatility has risen. Just remember that ATR is a volatility indicator, NOT a directional indicator. It’s s best used as a technical indicator to help confirm the market’s enthusiasm (or lack of) for range breakouts.