Volatility

Volatility describes the size of price swings over time. A pair that moves 150 pips a day is more volatile than one that moves 50. It is not a direction: a market can be very volatile while going nowhere overall.

How it is measured

• Historical (realised) volatility: the standard deviation of past returns, usually annualised.
• [ATR](/glossary/atr) (average true range): the average size of each bar's range, including gaps, over a period such as 14 days. It is in price units, so it is easy to relate to pips and stops.
• Implied volatility: derived from option prices, showing what the options market expects. Equity traders watch the VIX index; currency options have their own implied volatility measures.

What drives it

• Scheduled events such as NFP, CPI and central bank decisions.
• Unexpected news, political shocks and changes in risk appetite.
• Time of day: activity is usually highest when sessions overlap and lowest around the daily rollover.
• Liquidity: thin holiday markets can move sharply on small orders.

Example

Illustrative figures: EUR/USD has a 14-day ATR of 70 pips, GBP/JPY of 140 pips. A trader who wants to place stops at 1.5 times ATR would use 105 pips on EUR/USD and 210 pips on GBP/JPY. To risk the same 100 euros on each, the GBP/JPY position needs to be roughly half the size, before allowing for the different pip values. The position size calculator does this.

Common misconception

Higher volatility is sometimes seen as more opportunity. It is equally more risk: wider ranges mean larger losses at the same position size, more slippage and wider spreads. Volatility also changes over time, so last month's ATR may not describe next month.

See where to put a stop-loss and drawdown and recovery.