Volatility has been the talk of the town these days, as traders are starting to observe notable changes in market behavior. Market analysts have been paying closer attention to the wild price swings on an intraday basis and comparing this behavior to periods of less volatility.
What does volatility mean anyway?
Technically speaking, volatility refers to the amount by which an asset price fluctuates over a time period. It is measured by taking the standard deviation or the variance of price changes over a specified duration.
Woah, that's a lot of financial mumbo-jumbo!
Simply put, volatility is a measure of how moody the markets are. As my trading bros put it, a volatile market environment is as sensitive as a girl with PMS. When something goes right, the positive reaction is typically magnified. When something goes wrong, the saying "Hell hath no fury like a woman scorned" becomes a reality.
How is volatility measured?
As discussed in the School of Pipsology, technical indicators can be used to measure volatility in the forex market. In particular, moving averages, Bollinger bands, and the Average True Range (ATR) can be used to keep track of price fluctuations.
A more common method to measure volatility is through the VIX or volatility index. Dubbed as the "fear index", this particular tool gauges the implied volatility of S&P 500 options and is helpful in predicting overall market volatility for the next 30 days.
A rising VIX means that there is a lot of uncertainty in the markets and price action is expected to be very sensitive in the coming days. A falling VIX shows that there is lower uncertainty and market confidence is improving.
How volatile are the markets lately?
Over the past six trading weeks, the VIX has jumped by around 42% and is moving close to the 18 level. Although this is still miles away from the 60 level reached during the 2008 financial crisis, the recent spike is relatively sharp in historical standards.
With that, several analysts warned that a big shift in market environment may be in the cards. At the moment, the VIX is cruising above its 200-day moving average and is expected to stay there in the coming trading days. If that's the case, the 50-day moving average could make an upward crossover, which would signal further increases in volatility.
What the heck should I do now?!
DO NOT PANIC! Perhaps the worst way to deal with higher levels of market anxiety is to be increasingly anxious as well. Remember that we are dealing with a potential shift in market environment so it's crucial to maintain a focused mindset and keep your emotions in check.
A good way to start is by taking note of the changes in average price movements for a trading day. From there, you can make the necessary adjustments in your stops and profit targets. An adjustment in trading style, such as shifting from longer-term to shorter-term setups, might also be appropriate.
Got any other recommendations on how to adjust to higher volatility? Let us know by dropping a comment below!
Editors’ Picks
EUR/USD extends its optimism past 1.1900
EUR/USD retains a firm underlying bid, surpassing the 1.1900 mark as the NA session draws to a close on Monday. The pair’s persistent uptrend comes as the US Dollar remains on the defensive, with traders staying cautious ahead of upcoming US NFP prints and CPI data.
GBP/USD hits three-day peaks, targets 1.3700
GBP/USD is clocking decent gains at the start of the week, advancing to three-day highs near 1.3670 and building on Friday’s solid performance. The better tone in the British Pound comes on the back of the intense sekk-off in the Greenback and despite re-emerging signs of a fresh government crisis in the UK.
USD/JPY bounces off lows, back above 156.00
USD/JPY is starting the week markedly on the defensive, sliding back toward the 155.50 area where it has met some decent contention for now. The move lower in spot follows FX intervention chatter after PM S. Takaichi scored a landslide win in Sunday’s election..
Editors’ Picks
AUD/USD gets ready to punch through 0.7100
The intense sell-off in the Greenback underpins the solid performance of the Aussie Dollar on Monday, motivating AUD/USD to add to recent gains while challenging the key 0.7100 barrier, or fresh YTD highs, at the same time.
EUR/USD extends its optimism past 1.1900
EUR/USD retains a firm underlying bid, surpassing the 1.1900 mark as the NA session draws to a close on Monday. The pair’s persistent uptrend comes as the US Dollar remains on the defensive, with traders staying cautious ahead of upcoming US NFP prints and CPI data.
Gold picks up pace, retargets $5,100
Gold gathers fresh steam, challenging daily highs en route to the $5,100 mark per troy ounce in the latter part of Monday’s session. The precious metal finds support from fresh signs of continued buying by the PBoC, while expectations that the Fed could lean more dovish also collaborate with the uptick.
XRP struggles around $1.40 despite institutional inflows
Ripple (XRP) is extending its intraday decline to around $1.40 at the time of writing on Monday amid growing pressure from the retail market and risk-off sentiment that continues to keep investors on the sidelines.
Japanese PM Takaichi nabs unprecedented victory – US data eyed this week
I do not think I would be exaggerating to say that Japanese Prime Minister Sanae Takaichi’s snap general election gamble paid off over the weekend – and then some. This secured the Liberal Democratic Party (LDP) an unprecedented mandate just three months into her tenure.
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