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Top Forex Volatility Indicators

Forex volatility defines the risk an investor takes in the market. The higher the volatility, the greater the risk and the higher the potential returns. Forex volatility indicators help in identifying market breakouts and breakdowns. Based on this, one can place long or short orders accordingly. In our article, we will learn about forex volatility indicators and how to trade them.

What are forex volatility indicators?

Forex volatility indicators measure high and low volatility in the market. It helps in understanding if the currency pair prices are fluctuating quickly during a specific period of time or not. Based on the price-changing frequency, the volatility indicators help in placing long or short orders based on your trading style.

  • If you are a short-term trader, you can trade highly volatile markets to make quick profits.
  • If you are a long-term trader, you can trade less volatile markets to avoid hefty losses.

You can also identify if a market will reverse or continue with a volatility indicator.

  • If a market signals a reversal during an uptrend, traders can place short orders.
  • If a market signal reversal during a downtrend, traders can place long orders.

Top forex volatility indicators

1. Bollinger Bands

Bollinger Bands can determine if the current currency pair prices are low or high compared to its moving average. It comprises three bands:

  • The upper band that is plotted two standard deviations above the moving average price.
  • The middle band called the 20-day moving average price line.
  • The lower band that is plotted two standard deviations below the moving average price.

It helps identify market volatility levels by measuring the distance between the bands. The longer the distance between two bands, the higher the market volatility and vice versa. Whenever the current currency pair prices touch either the upper or lower band, it signals market reversal due to highly fluctuating prices.

  • When the prices touch the upper band, traders can place a short order to profit from the expected downtrend.
  • When the prices touch the lower band, traders can place a long order to profit from the expected uptrend.
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2. Donchian Channel

Donchian Channels indicate market volatility, overbought/oversold market conditions and breakouts. It identifies extreme bullish and bearish levels that lead to a market reversal. It does so through the three bands: upper band, middle band and lower band.

  • The upper band is made from the highest price levels of the currency pair over a specific time period.
  • The lower band is made from the lowest price level of the currency pair over a specific time period.
  • The middle band is made from the average price levels of the currency pair over a specific time period.

The area between the upper and lower bands is known as the Donchian Channel. Whenever the currency pair prices break above the upper band, it signals traders to place buy orders. Whenever the prices trade around or below the lower band, it signals traders to enter short orders.

  • The lesser the gap between the three lines, the lower the volatility in the market, signalling short-term traders to remain in the existing trade.
  • The higher the gap between the three lines, the higher the volatility in the market, signalling short-term traders to open new positions.
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3. Average True Range

Average True Range is a volatility indicator that indicates how much the currency pair prices have moved on average in a specific period of time. It helps traders confirm the ideal exit and entry levels. It determines market volatility by considering the gaps in the currency pair’s price movement over a period of specific trading days.

  • Whenever the ATR value is high, the market volatility is also considered high.
  • Whenever the ATR value is low, the market volatility is also considered low.

In most cases, the Average True Range is calculated based on 14 periods, either daily, weekly, intraday or monthly. It consists of a single line on the chart that moves above or below the prices.

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4. Keltner channel

Keltner Channel is a technical indicator that helps determine a trend’s direction. It uses the volatility in the currency pair prices to identify if the existing trend will continue or reverse. The indicator consists of three bands: the middle line, which is an exponential moving average, the upper band, which is placed two times ATR above the current price and the lower band, which is placed two times ATR below the current price.

  • When the bands are expanding, it indicates that the volatility in the market is high.
  • When the bands are contracting, it indicates that the volatility in the market is low.

When the current currency pair prices move above the upper band, it signals traders to place buy or long orders. When the currency prices drop below the lower band, it signals traders to place sell or short orders. The middle band can be used as the exit signal whenever the prices trade around this level.

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5. Parabolic SAR

The Parabolic SAR indicator identifies the trend direction, reversals and ideal stop-loss levels. It is represented on the graph as multiple dots that are placed above and below the currency pair’s price. Whenever a dot is placed below the price, it indicates an uptrend, and whenever it is placed above the price, it indicates a downtrend.

  • A continuous series of green dots indicate a continued uptrend and signals traders to place buy or long orders.
  • A continuous series of red dots indicate a continued downtrend and signal traders to place short or sell orders.

It can be combined with other indicators like the average directional index to understand the strength of the current trend. If the current trend is strong, it indicates less volatile markets and allows traders to trade with the market. However, if the current trend is not strong, it indicates a volatile market and provides traders with opportunities to buy and sell accordingly.

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6. Chaikin Volatility

The Chaikin Volatility indicator quantifies volatility as the difference between the currency pair’s high and low prices. It considers the price movement’s strength and buy/selling pressure in the market. You first calculate the exponential moving average of the currency pair’s difference between daily high and low price elves. Then, you calculate the percent by which the moving average has changed in the last few periods.

  • When the Chaikin Volatility indicator gives a high value, it indicates that there is high volatility in the market with a wide range between the high and low price.
  • When the Chaikin Volatility indicator gives a low value, it indicates that there is low volatility in the market with a narrow range between the high and low price.

When there is high volatility in the market and currency pair prices are touching constant high prices, it indicates a bearish market sentiment (short/sell signal). The same situation with low volatility indicates a bullish market sentiment (long/buy signal). On the other hand, when there is low volatility and currency pair prices are touching bottoms, it indicates that a bullish reversal can take place (long/buy signal). When there is high volatility, and currency pair prices are touching bottoms, it indicates that a bearish reversal can take place (short/sell signal).

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7. Volatility Index (VIX)

Volatility Index or VIX is a real-time index representing future market volatility expectations. It is generally measured for stocks but can be correlated to the currency pairs as well. It indicates volatility in the market by identifying the level of fear/stress in the market. The higher the level of fear or stress, the higher the volatility and vice versa. It provides values between 15 and 35.

  • Values equal to or below 15 indicate low volatility in the market with fewer price fluctuations.
  • Values equal to or more than 35 indicate high volatility in the market with high price fluctuations.

Since this indicator is based on the S&P 500 stock index, any rise in the index’s value decreases the value of VIX (low volatility), and any decrease in the index’s value increases the value of VIX (high volatility). Currency pairs correlated with the S&P 500 are then affected in the same way.

  • With a rising S&P 500 value, VIX falls, but highly correlated currency pair values also increase.
  • With a falling S&P 500 value, VIX rises, but highly correlated currency pair values also decrease.
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8. Ichimoku Clouds

The Ichimoku Cloud indicator provides in-depth information about a trend like its momentum, strength, volatility, direction, support, resistance and trend reversal levels. It consists of five lines: a 9-period average, a 26-period average, an average of the 9 and 26-period average, 52- a period average and a closing price line. The Ichimoku Cloud is formed by shading the area between the 9-period average line and the 26-period average line. This area indicates the level of volatility in the market. When the currency pair prices crosses the cloud form above, it indicates high volatility in the market towards the bullish trend; when the currency pair prices move below the cloud, it indicates low volatility in the market in the bullish trend but high volatility in the bearish trend.

  • Traders can place buy orders whenever the green Chikou line crosses the price action from below.
  • Traders can place sell orders whenever the green Chikou line crosses the price action from above.
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9. Average Directional Movement Index

The Average Directional Movement Index is a momentum indicator that measures how strong or weak the current trend is. It helps measure the current market volatility and provides values for the same.

  • When the market volatility is low, it gives a value equal to or below 20.
  • When the market volatility is high, it gives a value equal to or above 80.

This indicator is made of two lines, the +DMI and -DMI. When the positive DMI is more than the negative MDI, it measures the uptrend’s strength. The markets are volatile and potentially reverse when the uptrend is weak and continue when the trend is strong. On the other hand, when the negative MDI is more than the positive MDI, it measures the downtrend’s strength. When the downtrend is strong, the market volatility is low, and the downtrend continues, but when the downtrend is weak, the market is volatile and can potentially reverse in an uptrend.

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10. Relative Volatility Index

The Relativity Volatility Index measures the speed at which the currency pair prices increase or decrease. It provides values for the direction of volatility in the market.

  • Whenever the reading is more than 50, it indicates high volatility in the market.
  • Whenever the reading is lower than 50, it indicates low volatility in the market.
  • When the reading is equal to 50, it indicates a neutral price moment in the market.

Short-term traders can place buy or long orders in a highly volatile market to profit from the quick fluctuations. Long-term trades are advised to place orders in low volatile markets as prices change slowly.

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Add the volatility indicators to your trading chart today

Market volatility is one of the most important things to consider when trading forex. Since the forex market is one of the most volatile markets, you must know the future price movement of the currency pairs before placing an order. Start trading with Blueberry Markets, a forex trading platform to trade with volatility indicators and place successful orders. Sign up for a live trading account or try a risk-free demo account.

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