Volatility is the distance an asset moves in a certain timeframe.
Currency volatility is when the price has broken out of a flat movement and is moving in one direction or the other. Volatility can be a specific bar or a selection of several bars.
High market volatility is not necessarily associated with high volume. Sometimes, on the contrary, a decrease in liquidity in the order book can cause a strong volatile movement even on low volumes.
Let’s take a look at the last bar and try to assess whether it is volatile or not. You don’t need a ruler to calculate the length of each bar in mm.
Even visually, you can see that the price movement in the last bar differs from the previous ones by a factor of 2 in 2 weeks.
This is accompanied by a sharp increase in volume, which tells us that this instrument has become of interest to a large number of participants.
The volume is concentrated in the upper part of the bar, and the selling is predominant It is risky to go long because even if you hide the stop behind this volume candlestick, the distance to it turns out to be quite large (more than 10%).
The volatility analysis allows you to assess whether an entry is justified, the optimal distance to the stop, and to estimate the possible targets.
For beginners, we do not recommend opening a trade during high market volatility. Especially in the lower timeframes, because abrupt and sudden price movements are ALWAYS followed by rash actions by a large number of participants. When trading in high volatility level, it is more difficult to find the ideal entry point and stop distance. A short stop can easily be knocked out, while a long stop may not be appropriate due to a poor risk/reward ratio.
When considering a market idea, you should evaluate not only your working timeframe but also the neighboring timeframes. Where volatility may seem high to you in a 5-minute timeframe, it may be almost imperceptible in a 4-hour timeframe.
In the case of a volatile exit from a prolonged sideways movement, consider how the price behaved in that sideways movement. If it was already rising before the volatility cluster appeared, it means that the buyers have already made an effort to push the strength. Will they still have enough motivation to continue to do so?
Evaluate how the anomaly found correlates with other assets. When considering whether or not to open a trade when a volume volatility cluster appears, it is worth looking at other assets. If the situation is similar in most of the assets included in the top volume it may be a good factor to open a trade.
On the one hand high volatility in trading after the release of news or economic indicators is an opportunity to buy an asset at a lower price. Or to open a short at a higher price. However, given the imbalance in the stack when the volatility index fluctuates, it is almost impossible to predict further price movements at such times. Therefore, on important news release dates it makes sense to wait out the market or tighten stops on open trades.
Remember that scalping with volatility indicators on one-minute timeframes requires a fast reaction and almost perfectly calibrated entry and stop points. This, in my opinion, cannot be taught. It is something that only comes with practice and experience. And it’s not even about opening a position at the right time and quickly calculating the risks. Above all, you have to be mentally prepared for trading in high volatility, when the situation can turn upside down in a matter of seconds. Also, keep in mind that during sudden changes in the market, the price may be executed far away from your stop order.
In a volatile instrument, potential profits can quickly turn into losses. Therefore, you should consider locking in at least some of your profits if the price has moved a significant distance from the entry point.
Volatile assets will always attract traders with the possibility of higher profits. But not everyone can get used to such rapid price changes especially when it goes in a completely different direction. Even when it happens, you shouldn’t change tactics on the fly. ANY decisions you make should be based on facts and analysis, not emotion and panic.
If you are not sure which side is winning, sitting on the sidelines is a good decision. Periods of volatility don’t last forever and you may feel more comfortable analyzing and trading in a calmer market.
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