Chapter 12Volatility in Forex and Its Dimensions

This chapter reviews how volatility should be used in helping the forex trader evaluate market conditions. Volatility conditions, when added to classical support and resistance, and trend analysis identify high-probability trading opportunities and patterns.

By identifying currency pair volatility and associated exhaustion conditions, the trader gains knowledge of what the currency pair is doing. What the trader is most interested in is the behavior at prices at the extreme. A currency pair can reach a new daily or weekly high, but it doesn't mean that the price is likely to return to its average or mean price. When a currency is at a high, it is there for a reason. Perhaps new economic information pushed it to that new level. However, it is when a currency is at volatility high that the trader can deduce a potential for a reversal. This is because volatility cannot be infinite, then return to an average level. Understanding the behavior of price in terms of volatility is a building block of forex technical knowledge.

It is helpful in understanding volatility of currency pair prices to recall our everyday experience with volatility. A strong snow- or rainstorm has periods of varying intensity. But when the storm reaches its most intense period, one knows that it will soon be over. All of us have heard the phrase “the calm before the storm.” When the price is quiet, with small ranges and little change over time, it is recognized ...

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