How to Measure Volatility
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Usually the wider range of fluctuations higher volatility means higher trading risks involved. In this manner volatility is esteemed as a random value and its mathematical modeling provides basis for all risk assessment methods, used on Foreign Exchange market.
For volatility measurement statistical standard deviation is calculated. It also determines exposure of financial investments.
In intraday trading the most significant volatility indicator is average daily price range; in longer positions evaluation an average weekly, monthly or annual range may be used. Historical volatility equals to standard deviation of an asset values within specified timeframe, calculated from the historical prices.
Expected volatility is calculated from measuring volatility forex market current prices on the assumption that market price of an asset reflects expected risks. Volatility is regarded by Forex traders as one of the most important informational indicators for decisions on opening or closure of currency positions. It could be appraised through following financial indicators: All of them are integrated in popular trading platforms.
It reflects direction in which price volatility changes. Since Relative Volatility Index is determined by the dynamics of market data, which is not covered by other indices, it may serve as an excellent verification tool. It is RVI, used as a filter for independent indicators, which may define strength of a trend, measuring up the volatility instead of price, and this brings missing authentication element to trading system.
Moreover both return and risk are assessed in each separate moment or, in the best case, for certain discrete time series. In reality actual price quotations change constantly at different pace: Ultimately it gives possibility of estimating not only potential return on investments but also risks exposure. Special emphasis on volatility analysis should be made for futures and option market.
Volatility value is critically important for call and put option assessment. It could be said that if on spot market traders are more concerned with return then on futures market they think further about volatility and risks. When traders say measuring volatility forex market market is highly volatile this means that currency quotations change drastically during a trading session.
High volatility of the market stands for higher risks for investors but generate more opportunities of high profits. Many novice traders tried to enter highly volatile market looking for bigger profits and quickly suffer serious losses. Experienced measuring volatility forex market may like to utilize a volatile market opportunities up to direct volatility arbitrage.
Analytical information on currency pairs volatility is open to public and easy accessible. In most cases measuring volatility forex market is provided measuring volatility forex market by Forex brokers measuring volatility forex market through their trading platforms.
Numerous statistical researches have spotted empirical rule that market volatility in terms of standard deviation is proportional to square root of observation period. But volatility is different on different market segments and may increase significantly faster than according to above mentioned rule.
This page is part of archived content and may be outdated. There are two types of Volatility Historical volatility equals to standard deviation of an asset values within specified timeframe, calculated from the historical prices.