What is volatility?

Volatility is a statistical indicator that displays the degree of currency price dynamic. Volatility is considered one of the most important indicators that helps manage risks. Simply put, volatility is the difference between the minimum and maximum price in a specific time interval. Most often, traders observe daily volatility. In this case, the value of volatility will be the difference between the maximum and minimum price for the trading day.

You should understand that Forex is a market that is characterized by continuous changeable price movement. In this regard, the volatility for two different days, weeks or months may differ.

Why do we need to calculate volatility?

Perhaps, the most important in calculating volatility is a clear understanding of which currency pair is most profitable. Knowing the volatility of a particular currency, a trader can choose the most volatile and, therefore, the most profitable instrument in his portfolio.

Suppose, we know what volatility is, but calculating it is not very convenient. This raises the question of which indicators can be used to calculate volatility.

To date, there are various indicators for the MT4 trading platform, which facilitate the process of calculating the volatility level. The most popular indicator for calculating volatility is the Average True Range. This indicator determines and graphically displays the average volatility for a certain period. The data in the MT4 platform is represented as a line that is constructed as a moving average of the range. This range is defined as the maximum of the following values:

The difference between the minimum and maximum;
The difference between the previous close price and the current maximum;
The difference between the previous close price and the current minimum.

How to measure volatility with the Average True Range

Suppose, a trader decided to choose the most liquid currency pairs for trading, that is those that have the highest average daily volatility. To do this, you need to set the ATR volatility indicator on the daily time frame and set a certain number of days in the settings. It is recommended to set at least 100 days. The indicator will determine the average volatility for a certain day in the exchange market.
In addition, it is possible to determine goals for day trading more consciously, using the volatility indicators. Knowing the average daily volatility of a currency pair, it is inappropriate to set a take profit, exceeding it.