How to Use Forex Volatility Statistics
It’s possible to track how much a currency pair moves on average each day, how much it moves each day of the week, and even how much it moves each hour. This information, which is readily accessible, aids traders in making better trading decisions, such as when to enter and exit trades, and where to set profit targets.
Wouldn’t it be nice to know if the EURUSD is likely to move 60 pips today, or 90, or 120? While we can’t know for sure what a currency pair will do on a given day, we can use averages to give ourselves a good idea. Forex volatility statistics provide this for us. We can see how much a currency moves on average each day, how much it tends to move each day of the week, and how much a currency pair tends to move each hour. For reasons we will discuss below, there are significant benefits to having and tracking this information on a regular basis.
The figure below shows multiple currency pairs. The columns along the left show various currency pairs along with a small graph with the recent price movements. The column we care about the most is the one called “pips”. This is how many pips the currency moves, on average, in a 24-hour period. By default the average is calculated based on the last 10 weeks of price data. This can be altered by putting in a different amount of time, such as 5 weeks, or 20 weeks in the Formula box and then clicking the refresh button next to it.
Click on a currency pair to bring more detailed data. In the figure above the EURCAD pair has been selected, which brings up additional charts on hourly volatility and day of the week volatility.
While the “pips” column gives the average of how much a pair moves each day, certain weekdays tend to be more volatile than others. In the example above, the EURCAD has average daily movement of 114.84 pips, but Monday (1) and especially Tuesday (2) tend to have volatility lower than the average. Wednesday (3) and Friday (5) tend to have volatility above average. Thursday (4) is close to average.
Within each day, certain hours are more volatile than others. The hourly chart is set to the GMT time zone. The current hour and day when you view these charts, on Mataf, are always marked in yellow. In this way, you can make a quick time conversion if needed. For day trading, consider trading during the times of day where there is increased market volatility, and avoid day trading during the hours when volatility is really low
Please note that this is a snapshot in time, and these statistics will constantly change. The hours that are most volatile tend to stay the same, but how much the price moves during these hours will change. Which weekdays are most volatile also tend to stay the same, but could change over time as well.
When you click on a currency pair on the Mataf volatility statistics you will also see a third chart. This chart shows volatility over the last several years. This is useful for assessing overall market conditions. For example, you may have had a phenomenal year day trading or swing trading last year, but then over time you start struggling. It could be a change in volatility.
The chart below shows the long-term daily volatility in the EURUSD. Back in 2010, 2011 and 2015, the EURUSD was moving more than 140 pips. That makes it a little easier to jump into strong trends. In 2014, 2016 and 2017, volatility was largely below 100 pips per day on average. Do you think a 40% or more change in volatility could affect your trading? It will, meaning we need to adjust for such changes.
Ways to use Forex Volatility Stats
There are multiple ways to use forex volatility statistics. Some of those ways are discussed below.
–Changes in volatility can be used to confirm changes in direction, or point to an acceleration of the trend. Sharp moves to me are more important than a meandering price which has little force behind it. For more on this topic, see Velocity and Magnitude.
–Volatility is often associated with a change in the direction. Trends are often complacent, reversals are not. Therefore, heightened volatility is usually seen during corrections within trends and in trend reversals.
–While a pair moves a certain number of pips in 24 hours, it will move less during the specific hours we are trading (since we can’t trade all day). For instance, the EUR/USD may move 120 pips per day, but only move 85 pips during the US session, or 75 pips during the European session. If the daily figure is used, but we are only day trading for a few hours each day, the statistic could be very misleading. If day trading, be aware of the specific stats for the time of day you are trading. See Best Time of Day to Day Trade Forex for more details.
–During a trend volatility is often steady or will decline. If the trend accelerates we will see a rise in volatility. This can be a confirmation or a signal the forex market is nearing a turning point (a very powerful volatility thrust after a long-term trend is called a “blow off”), but it depends of the maturity of trend. An example of a trend accelerating in a “blow off” fashion, which led to a big trend reversal, is the USD/CHF in August of 2011.
–Changing the number of weeks that are averaged on the volatility study may greatly affect the data provided. If you are a short-term trader, track volatility statistics based on the last 3 weeks or less. Longer-term traders can benefit from looking at volatility averaged over the longer term (default is 10 weeks). All traders will want to monitor volatility over time, as this may provide insight into reasons for improved or lack-luster trading performance.
–Intraday volatility, which is the number of pips a currency pair moves in day, provides a lot of information about where to place profit targets and when to enter trades. If you wish to exit a position today, the chances of an order filling well beyond the daily average range are slim, unless there is a significant news event occurring.
Say the EURUSD already moved 100 pips today (distance between high and low), and average movement is only 80 pips for the weekday you are trading (subject to change). If you buy near the high, expecting the price to go even higher, you are going against the statistical odds. Buying near the high and placing a target 20 pips above means the price will have to move 120 pips that day…well beyond the average of 80. While it could happen, it’s not a high probability trade. Same with taking a trade near the low of day, in this case, and expecting the price to drop even more. If the price has already moved beyond what it typically moves in a day (and there is no major news that is driving the increased volatility), it’s a low probability trade to expect the price to keep expanding its range a lot more.
That said, an average is just an average. It is not a crystal ball. Any particular day may be more or less volatile than the average indicates. Intraday volatility should be on a day trader’s radar, but it is not the only factor to consider.
–Volatility lets us know when to trade, and when not to. Day traders are especially susceptible to the cost of paying the spread, and when volatility drops so does profit potential. Less volatility, and reduced profit potential, makes the spread more expensive. Therefore, short-term traders usually benefit by NOT trading when volatility is very low.
–Certain days of the week provide greater opportunity. Certain hours of the day are more volatile than others. Stick to the day and times that offer you the greatest opportunity. This may vary depending on your strategy.
–If your trades last more than a week, the daily data provided by Mataf may be overkill…you simply don’t need that much data. Apply an Average True Range (ATR) indicator to your charts, and this will likely provide you with all the volatility information you need.
–If using an ATR, you can change the time frame of your chart from daily to weekly. On a weekly chart, the ATR will show how much that currency pair typically moves over a one-week period.
–Volatility is always changing. Monitor changes in volatility, especially if your strategies are sensitive (most are) to these changes.
Final Word on Forex Volatility Stats
This is a brief introduction on how to use forex volatility statistics. Forex traders are encouraged to educate themselves further on volatility and statistics.
Refer to the Daily Forex Stats page for forex volatility resources, as well as other trading statistics such as correlation. You may find that being aware of volatility helps you control risk, find alternative trading strategies and alert you to potential dangers or opportunities.
By Cory Mitchell, CMT