Glossary:What is volatility?

2021/07/25

Technical analysis
Volatility

Volatility in forex trading is a measure of how often and to what degree a currency’s value changes. A currency is described as having high or low volatility depending on how much its value deviates from the average (volatility is a measure of standard deviation). High volatility means higher trading risk, but it also represents an opportunity for traders because of the large price movements.

How to Identify Currency Volatility

Currency volatility is difficult to identify and track because, by its very nature, it is unpredictable. However, there are several ways to measure volatility that can help traders predict what will happen.

In addition, two types of volatility must be addressed for accurate measurement: historical volatility and implied volatility. Historical volatility is what has already happened, while implied volatility is a measure of a trader’s expectations for the future (based on the price of a futures option).

Historical volatility can be seen on a chart, where you can clearly see price spikes and drops.

USDJPY daily volatility as displayed

For implied volatility, we use the VIX, an indicator of market volatility in relation to currency volatility: a high VIX indicates high stock market volatility, while a low VIX indicates low volatility.

About the Cboe Options Exchange, the originator of the VIX

Founded in 1973, the Cboe Options Exchange is the world’s largest options exchange, focusing on individual stocks, indices, and interest rates. Originally known as the Chicago Board Options Exchange (CBOE), the exchange changed its name in 2017. Cboe is also the originator of the Cboe Volatility Index (VIX), the most widely used and recognized indicator of market volatility.

Key Features of the CBOE

The Cboe Options Exchange was formerly the Chicago Board Options Exchange (CBOE) In
2017, the holding company and the exchange were rebranded as Cboe Global Markets Inc. and Cboe Options Exchange, respectively
Cboe is

the originator of the

home to the VIX Volatility Index and many other volatility products.

Finally, the VIX Index is the best barometer of stock market volatility. The index is based on the real-time price of near-the-money options on the S&P 500 Index (SPX) and is designed to reflect investors’ consensus view of the expected volatility of the stock market in the future (30 days). the VIX index is a good indicator that the market is becoming very bearish, that the market is becoming more volatile, that the market is becoming more volatile. Traders refer to the VIX Index as a “fear gauge” because it tends to jump to very high levels when investors believe the market is becoming very bearish or volatile.

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