Definition of Volatility
The definition of volatility is a statistical calculation of the value in which the price rises and falls between a stock’s value or foreign currency. This difference in value represents a market activity that has a direct impact on trading risk. Markets that have high volatility will cause faster price movements compared to markets that have low volatility. That way, get more info about this here.
Volatility is not the same as risk. In this case, volatility can be used to measure risk opportunities, but you cannot directly use it as a source of risk in forex transactions. The risk is the same, it’s just that the impact of the risk is higher because the number of transactions is also large.
An example that is easy for you to understand is the GBP / USD pair which on the same day has high pips movement. If you look at the chart below, there is a high difference in value on the same day between the GBP and USD prices which rose at the opening price at 1.3040 to 1.3175. You can count the number of pips between GBP and USD which is 0.0001 per pip. So that on that day, May 3, 2019, the market has high volatility with a difference of 135 pips.
If you trade on that date, you could reap high profits due to high volatility, but it’s different if the candle bar is red. You tend to experience big losses if you trade when the market is falling.
The high movements of the forex market are usually dominated by GBP / USD, EUR / JPY, GBP / JPY, and EUR / USD. However, this is not absolute because sometimes a currency pair can have high volatility due to economic and political turmoil or international issues that hit one or both of these currencies. This uncertainty causes the movement to tend to be high because only some parties can take advantage of this high opportunity but with a high risk.
The definition of volatility can differ, especially when it comes to price fluctuations in the value of shares and the difference in the price of a pair of foreign currencies.
Specifically, stock volatility is the standard deviation calculated on an annual basis which is then used to measure the risk of the stock in the following year. Some stock values have higher volatility than others. This is because the number of different transactions also results in significant price changes in a short period.
However, fundamentally the value of a stock price tends to be stable, it’s just that if you trade stocks to take advantage for a short period, then stocks with high volatility will have more potential to increase in price quickly, even though the risk is also higher.
In stocks, you can measure volatility by using historical data as well as today’s trading data.
Foreign Exchange Volatility
Meanwhile, if you refer to foreign exchange trading, volatility is the frequency of trades that occur in a period and affects the value of the foreign currency pair traded. For those of you who want to look for high profits, trading popular forex pairs such as GBP / USD and EUR / JPN can be the best choice.
This is due to the high level of volatility of the two pairs so that you can reap big profits in a short time. Don’t forget that even though the potential for profit goes up high, the risk of falling in the value of a currency is just as great, therefore this type of trading is known as high risk and high return.
Whereas many other forex pairs, some have low volatility, so the ups and downs of the currency pairs also tend to be more stable. Therefore, the potential profit is lower when compared to forex pairs with a higher level of volatility. Likewise with the risks.