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Pros and cons of using TOP 3 volatility indicators
Pros and cons of using TOP 3 volatility indicators

Every trader has to deal with volatility on a daily basis, on which, in fact, the profitability of each trade depends. Several technical indicators have been developed specifically to determine the range of price fluctuations in a financial market. Each of them has its pros and cons, so specialists recommend using indicators in combination to filter out unnecessary “noise” and let through the most credible signals. In the article, we will look at the TOP 3 of the most useful and efficient indicators chosen by the most successful market participants.

What should be remembered

Volatile periods in Forex are unpredictable, and in the worst possible case, can cause big movements up or down, which makes trading extremely difficult. As a rule, volatility is highly dependent on the news: once an important piece of news has been made public, you can expect extreme volatility. Weak price fluctuations are observed during a consolidation period.


Depending on the market situation, the trader's strategy should also be adjusted. The situations are as follows:

 

  1. High volatility. In this case, trend strategies that allow you to capture a particular movement of interest will be a great option. Breakout strategies work well near points of price consolidation.
  2. Low volatility. In this case, it is better to give preference to channel-based strategies. You should use reversal trading strategies only by combining them with the main support and resistance levels.

 

As you can see, once you understand what phase Forex is currently in, it is very easy to improve your strategy and adapt it to the market conditions. As a result, enjoy more profit and less loss.

Trading with ADX

ADX is one of the most popular market indicators. It is designed to measure the strength of a trend. It analyzes the maximum and minimum prices for a selected period of time. Usually, newcomers to trading choose a period of 14.


Remember that:

 

  1. The intersection of the lines in the range between 20 and 25 indicates the beginning of a trend (upward or downward).
  2. A downward movement of the indicator signals the end of the trend.
  3. All intersections below 20 indicate a consolidation phase in Forex.

 

Until the indicator rises, the trend continues to strengthen, but once it falls, the trend is weakening.

The main downside of the ADX indicator is that it is unable to show the direction of a trend. The indicator is also considered lagging and cannot give timely signals.

Trading with the ATR indicator

The tool is designed to measure the true range over a specified period of time. As in the previous case, the period is most often 14.

A feature of the true range is working with the preceding bar's closing price.

The indicator can measure only the range of price fluctuations, while it cannot confirm the presence or absence of a trend. In reality, this sometimes misleads traders. For example, the market may well be volatile when there is no clear trend on the charts and the price fluctuates in the minimum range.


The disadvantages of the indicator:

 

  1. It is unable to determine the trend direction. In other words, the indicator can fall if there is an uptrend, and vice versa, rise during a downtrend.
  2. It cannot show the exact beginning or end of a trend.

 

Bollinger Bands

This indicator can also be used to handle volatility. The undeniable advantage of Bollinger bands is that they allow you to see not only the volatility but also the market trend.

When using the indicator, it is important to know that:

 

  1. Once the market changes its direction, the bands also change their movement.
  2. The evidence of a strong trend is a price movement as close as possible to the upper or lower band.
  3. The movement of the price from one band to another indicates that there is a trend change or the market is entering a consolidation phase.

 

Despite the advanced functionality of Bollinger Bands, the indicator cannot be considered ideal since it has a certain delay in the formation of signals. But in any case, the use of volatility indicators in your strategy for successful trading in the financial market is absolutely necessary.

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