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Inside the Currency Market: Mechanics, Valuation, and Strategies by Brian Twomey

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Volatility and Volatility Indicators

To measure risk is to measure volatility. The question is how far will prices vary in relation to expected returns? Two instruments can realize different returns based on variations because we are squaring the difference from the mean as a measure of variability. So volatility must be measured by squaring the variance to obtain a standard deviation to obtain an accurate view of volatility.

Volatility is measured by standard deviation calculated by standard deviation of daily returns over X trading days to annualize the figure. This measures the spread of prices around the mean—the average. When prices are close to the mean, standard deviation is low, and high when prices are far away. The general strategy ...

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