Market Volatility - How High Are the Waves?


Brief:

Market volatility is a measure of the size of changes in market's value, over a certain time period - it determines the "height of waves" in the market: whether the market is calm or turbulent.

What are your options?

1.    Analyze the relative size of the market changes in the markets you are trading

2.    Try to estimate the impact of the volatility on your open trades in different time frames (1 hour, 2 hours and so on)

3.    Make sure you use Stop-losses wisely and in accordance to market volatility

Overview:

Market prices change every second due to bid and ask rates, and traders are required to place orders rapidly while market conditions are constantly changing, similar to swimming in the ocean. In order to make sense of the market, the Guardian Angel describes current volatility into 5 categories:

1.    Very calm

2.    Calm

3.    Moderately volatile

4.    Volatile

5.    Highly volatile

Each of the categories above is determined differently in each traded market, in relation to the behavior of the market over a long period of time. In general, here is an example of categories:

  1. Calm Market ("low volatility level") – small statistical probability of large market moves in the opposite direction of your current trade; one that could cause forced trade termination.
  2. Moderate Volatility - market fluctuations are larger than a calm market – trade with more caution is required.
  3. Volatile Market – large market fluctuations - trade with extra caution and adjust your risk level accordingly 
        Volatility is not constant as time passes by – short term volatility in the last hour can't imply this level stays the same several hours later. Also, it is important to pay attention to the fact that at weekends or holidays when regular trading doesn't take place or trading activity levels are low ("low volume"), sudden market movements can  occur when trading starts again  ("Market's gaps"), that would affect volatility levels.
News and special events also have an impact on volatility. Calendar events are likely to occur while your position is open. They may cause a sudden market move and uncertainty in the following market direction.