Defining Trading Volatility

How do you define a volatile market?  How do you define trading volatility?  When is a volatile market trade able and when isn’t it?  All very important questions to ask.

Let me first say what a volatile market is NOT.  If a currency pair is stuck in a 50 pip range, that is NOT volatility.  It’s just chopping around in a 50 pip range.

Now that we have gotten no volatility out of the way, I can describe to you “good” trading volatility and “bad”  trading volatility.  Trading volatility can be subjective, but we can look at a few charts to clear things up.

Let us go over “bad trading volatility.” Bad volatility can mean:

1.  The market makes a huge move that you were unable to catch because it occurred too quickly.

For example, the USD/JPY 300 pip drop during March 16, 2011.  That is bad volatility.  Why?  Because it occurred within a 20 minute window after 5pm EST in the twilight zone, and it was stop loss driven and you didn’t have much time to take advantage of it.  It’s difficult to take advantage of bad trading volatility.  Unless of course you were already short and had a your take profit order there and it was filled.

As you can see in the above example of trading volatility, the USD/JPY made a huge move and it was difficult to take advantage of that trading volatility.  Lots of stops were tripped and the move happened very quickly during an illiquid market session.  That is bad trading volatility.

There is also “mediocre trading volatility.”  Mediocre trading volatility occurs when the currency pair of financial instrument is making decent sized moves between some support and resistance point.  It is not breaking out and trending, but instead it is just making decent moves between the ranges.

In the above EUR/USD example we have mediocre trading volatility.  The market is not trending and has not broken out.  It is stuck between the 1.4300 support and 1.4900 resistance.  It is decent trading volatility.  There are some decent moves between the support and resistance to the tune of 400-600 pips.  Thats not bad.  It’s not the best, but it doesn’t stink either.  It’s mediocre trading volatility.

Then there is “good trading volatility.”  Good trading volatility means that the market is making a nice move, and it gives you nice entry points, preferably multiple entry points, with good liquidity, and preferably sustains the move for multiple price bars.

An example of good trading volatility can include the AUD/USD move from .98 cents to $1.10 from March 2011 to May 2, 2011.  Nice moves, steady moves, giving you multiple entry points depending on where you wanted to get in.  The market moves over 10% in less than 45 days.  That is trading volatility especially to a swing trader or global macro trader.

Now for the day trader, good trading volatility usually just means the market makes 1 huge day up day or down day.  I would say at least a 1% move.  Therefore usually a 1% move in the currency pairs is over 100 pips.  So if the eur/usd moves 150 pip as it just has made as I am writing this on Friday June 3, 2011, that is great trading volatility for the day trader.  They capture over 100 pips if they can, close the trade before the end of the day and call it a day.  They caught a nice volatility burst.

Always remember that not all forms of trading volatility are good.  If the market doesn’t give you ample time and liquidity to get into a trade, then what good is the volatility?  Therefore as a general rule trading volatility is only good if you can take advantage of it.  Of course having a strong knowledge of Order Flow, Global Macro, and News Trading skills help immensely.

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