Knowing the condition of the market you are in can be an advantage to your trading and these can be done with the help of several forex volatility indicators. Basically the market will be moving in the following 4 conditions
- Trending and Quiet
- Trending and Volatile
- Ranging and Quiet
- Ranging and Volatile
The reason why you need to know the condition of the market is because it will determine what trading strategy you have to employ in order to be profitable. There is no one size fits all strategy that works on all market conditions as different market condition requires different trading methodology. What works for a trending market may not work in a ranging market and vice versa.
In this post, I will share with you several forex volatility indicators that I often use to help me check the market volatility before I start to do my trading.
1) Bollinger Bands: You should have heard of the BB as it is commonly mentioned in trading books and courses. The Bollinger bands consist of an upper and a lower band that envelope the candlesticks and it is through these bands that you tell the market volatility.
When the Bollinger bands are squeezed together, you are in a low volatility market. When they are far apart, you are in a market of high volatility. One good use of this indicator is to help you trade the forex breakout.
2) Average True Range Indicator: This indicator can be used to give you a gauge of the range of the market. Normally, it is set as 14 and depending on the time frame you are in, it will calculate for you an average true range of those 14 candlesticks.
If you are trading the daily chart, it will calculate for you the average true range based on the 14 daily candlesticks. The higher you see this indicator moves, the more volatile is the market and the lower you see it moves, the less volatile is the market.
After knowing the volatility of the market, you need to find out whether the market is trending or ranging so that you can decide on the type of trading strategy to use.
Below are the 2 forex indicators that I use to tell the movement of the market
1) Moving Average: In order to tell whether the market is trending or not, you can plot a 200 EMA and then read the gradient of the EMA. If it is sloping up, you are in an uptrend and if it is sloping down, you are in a downtrend.
2) ADX Indicator: This is another indicator you can use to tell whether the market is trending or ranging. Whenever the market is trending, you can see this indicator pointing up and moving above the 25 level. If the market is ranging, this indicator will usually stay below the 25 level.
With these 4 forex volatility indicators, you will now be able to tell which market conditions you are in and eventually decide on your trading strategy that can best trade in that particular conditions. In this way, you can prevent yourself from trading blindly.