What is volatility?This term refers to the variability of prices.If the chart to determine the minimum and maximum price for a certain period, then the distance between these values is the range of variability.This is the volatility.If the price of drastically increased or decreased, the volatility will be high.If the range of changes will fluctuate within a narrow range, the - low.
Origin of the term The term "volatility" comes from «volatile» - Middle French word, which, in turn, came from the Latin «volatilis» - «fast", "volatile".It is worth noting that the French language and have a different definition of volatility.This term is also referred to overvaluation.
volatility
theory This theory is based on the analysis of changes of any economic indicators: interest rates, prices and so on.This takes into account the changes taking place for a long time.Determining what volatility, econometrics are two main components.The first - the trend when price fluctuation occurs according to certain laws.Second - volatility, when the changes are random.To accurately predict the situation, it is necessary to consider not only the mean value but also the expected deviation from the average.
For example, the analysis of the securities market must be considered random deviation indicators, as the cost of stock options, shares and other financial instruments is highly dependent on the risks.The theory developed by the volatility of the American economist Robert Engle.He determined that the deviation from the trend could change significantly over time - periods minor changes followed by periods of strong.The real exchange rate volatility variable, long-term economists use to analyze only static methods based on the constancy of this indicator.Robert Engle in 1982, has developed a model, which implies a variable spread volatility, with which it became possible to predict price changes.
Types volatility
Considering that this volatility, it is necessary to note two kinds: historical value and expected.Historical views - a measure equal to the standard deviation of the price of a financial instrument for a set period of time, which is calculated on the basis of available information about its value.If we talk about the expected market volatility, this indicator is calculated based on the value of a financial instrument based on the assumption that the market price reflects the risks.
on the market should take into account not only the direction, but also the period for which there is a change, as it affects the probability that the price of the assets exceeds the value of the critical participant.To set the record volatility of the market as a whole, it is necessary to calculate the volatility of the stock index.
How and why volatility is measured
The easiest way to determine this index as an indicator of the standard deviation and use of true price range - ATR.The first thing to determine the average value for the volatility of its currency pair over a long time period, and then in the analysis necessary to emphasize the ratio of current and average volatility.
determines that such price volatility, it is necessary to analyze the potential profitability of the currency pair.When the rate of change of prices at a high level, and at the same time spread is insignificant, we can talk about the high profitability.It is worth noting that the high level of volatility associated with greater risk, since the protective order "stop loss" is essential, and also increase potential losses.
Bollinger Bands
to visualize what the volatility is necessary to use an informative indicator - Bollinger.He paints a channel for prices significantly expands when it snaps changes.If the sample is in a narrow range, it may indicate the beginning of a lucrative traffic, but it is worth remembering that often these breakdowns can be false.When we define the average value of the volatility of the currency pairs of the day, we can generated from daily minimum or maximum take this figure and eventually get a goal and taking the yield of the order placing "stop loss".
For example, if we consider that a couple of the day usually goes within a hundred points, there is no need to put a "stop loss" at a distance of two hundred and it makes no sense to count on big profits in excess of the average daily range.If we analyze the price risk in the financial markets, it is, for example, the calculation must take into account the volatility of the shares is not very price sequence and the sequence of relative changes.Thus it is able to achieve greater comparability of various assets.For example, the new shares may be ten times increase and drop in value, so expect the volatility of the shares, using absolute values is impossible.Moreover, the sequence of relative change is more stable in the sense that its mean value and variance are stationary when compared with the same characteristics are not analyzed prices.In any case, as is commonly believed.
volatility indicators
Despite the fact that many employees dealing centers argue that the volatility of the currency pair indicates good profitability of the transaction, do not forget that the high level of volatility - this increased risk.In the volatile pair luck can turn rapidly, and losses will increase significantly.To reduce the risks, you should always use the order "stop loss", even if the market goes in the direction of profits, and says nothing about potential losses.In the forex market to the volatility indicators are Bollinger Bands, CCI, Indicators Chaikin.Also used as indicators of performance and standard deviation.
