The rate of volatility in the financial markets

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Technical analysis can provide a great addition to any trader in the financial markets, by analyzing the historical price movement using technical tools and trying to extrapolate the price direction in the future, and among the most important of these tools, indicators that measure the rate of volatility.

In this article, we will discuss the concept of volatility in the financial markets and the most important indicators used to measure it and how to benefit from them in trading.

The volatility rate measures the change and volatility in the price of a financial instrument during a specific time period, and it gives a picture of the extent or field in which the price moves up or down. Like 0.05 or simply the number of points.

Volatility is considered high or high when the price of the financial instrument changes rapidly over a short period of time, while volatility is considered low, if the price fluctuations are slower and the time period is longer.

The volatility rate is not fixed, it changes with time and according to the type of the financial market. There are financial instruments with high volatility and therefore a high risk rate, such as the currency and gold market, and markets with low volatility are safer, such as the government bond market.

In addition to the type of market, the volatility rate is affected by the prevailing psychological state among investors, as volatility is high during important and influential news times, such as central bank decisions about interest and monetary policy, and it also rises during times of economic and political crises and the spread of fear and uncertainty.

The rate of volatility also changes according to the timing of trading. For example, in the foreign exchange market, volatility is at its highest during the working period of the financial markets in Europe and the United States, while it decreases during the Asian trading period.


There are many indicators that are used to measure volatility, and they differ among themselves in the mathematical foundations or equations used in calculating them, as well as in the way they are read and used in trading.

There are two basic indicators, the most famous and used among traders in various financial markets, which are the Bollinger Bands indicator, and the Average True Range (ATR) indicator.

In the rest of the article I will put illustrations from the company's platform UFX (UFX), but these indicators are available in all Trading company platforms operating in various markets.

average true range indicatorATR):

It is considered one of the most important indicators that measure the level of volatility and volatility of market prices. This indicator was developed by Wells Wilder.

Reading the indicator is simple, the indicator's histogram rises to the top when volatility is high and falls to the bottom when volatility is low.

For example, in the following chart, we notice that the ATR index has risen very significantly, after the extreme fluctuations that the GBP/USD pair witnessed during the Brexit referendum.

money markets

money markets

Bollinger Bands Bollinger Bands:

Bollinger Bands are one of the popular indicators among traders and analysts to measure volatility, and this indicator was created by John Bollinger in the early 1980s. This indicator consists of three lines, the upper and lower line and the middle line. If the rate of price volatility increases, the distance between the upper and lower lines widens, but if the price movement is calm and stable, the distance between the two lines narrows.

In the following chart, we illustrate the previous example of the GBP/USD pair using the Bollinger Bands.

Bollinger Bands

Bollinger Bands

Volatility and Risk Management:

The volatility rate is one of the tools for measuring the risk ratio in trading. There is a direct relationship between the risk ratio and the volatility rate. The higher the volatility rate, the higher the risk and uncertainty in the direction of future prices and vice versa.

On the other hand, the risk ratio is also in a positive relationship with the rate of profit that can be achieved. In the end, the price movement is what allows traders to achieve profits. The higher the rate of this movement or volatility, the higher the number of opportunities.

The clincher here, is that a professional and successful trader always calculates the risks and losses that he can bear before considering the profits that he seeks to achieve. This is where the volatility rate comes into play as an effective part of the risk management strategy.

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Mohamed Abdel Khaleq

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