Do you know The difference between Volatility and Momentum?
It is important to understand the difference between volatility and momentum or it can lead to many misunderstandings. This can lead to expensive trading errors. Results such as completely poor mapping, poor market analysis and poor trade decisions can occur.
Below we will investigate the differences between volatility and momentum that are two fundamentally different things. You will learn how to use them for effective trade decisions.
Volatility describes how much the price fluctuates around an average.
If you are using sliding agents, the price goes back and forth around the sliding agent. Then the market is in a high volatility environment. Volatility is often also called a risk indicator. This is due to the major price fluctuations that can signal decision-making on the market. Thus, the forces between buyers and sellers are constantly changing.
You could almost say that momentum the opposed to volatility. In a high-speed market, the price is only in one direction. Momentum is often called trend strength. If the market is exciting, no momentum will be gained, as prices move back and forth between two limits. This means that the strongest trend has little or no volatility but a lot of speed. A varied market often has high volatility and low momentum. Most often, at the end of a trend, you can see the volatility “picked up” when the momentum decreases.
Below we present the four most commonly used volatility tools. There are more different trading tools and concepts when it comes to analyzing and measuring volatility.
1. ATR = Average true range
This is not a purely volatility indicator but it analyzes the light size and how far the price has traveled on average over a given period of time. If an ATR solution is high, the price has moved further in the case of a song ATP shows that the price lights decrease in size.
2. Bollinger bands
Would guess that this is the most widely used volatility tool. The outer Bollinger straps visualize twice the standard deviation of the price. The expansion of Bollinger Bands therefore shows a high volatility market environment. A narrower Bollinger Band signals a contractual and low volatility market environment.
3. Candlestick shape
Often, it can be enough to just look at pure price charts. Candles that are increasing in size and also leave long shadows signal high volatility. On the other hand, candlesticks with no wick and only going into one direction show less volatility.
4. Volatility Index – VIX
Used to measure broader market volatility. It is also extremely useful for evaluating market sentiment and risk appetite. During higher risk periods, VIX climbs and investors tend to become more conservative. If VIX becomes low, it shows a higher risk appetite and a less wide volatility in the market.
They are a big difference in the tools used to measure momentum in comparison to the volatility tools. Many traders confuse these two so it is important to know the different trading tools that you use to make your own trade decisions.
1. RSI = Relative Strength Index.
Relative Strength Index, simply measures the RSI price strength.
High RSI means the trend is up and there are no or some bearish price lights in a given period. RSI compares the candlesticks even when the size.
2. CCI – Commodity Channel Index.
CCI measures how far the price is from a given moving average.
A high CCI then shows that the price has been deducted from a moving average. If the CCI is around 0, it means that the price has fluctuated around the moving average.
Used often as interval indicators, but Stochastic is in its essence in a momentum indicator. Then they measure how far the price has traveled and how close the price closes on the top or bottom of a candle holder. Therefore, you do not think wrong that an overcooked Stochastic indicator indicates that the price will turn for a minute – it may just as well show a strong strike.
Trend strength indicator used to distinguish between interval-bound or weak / strong trends. A reading below 30 signals a typical range while ADX values over 30 show a trend. A “hook” on an ADX can then indicate a potential trend conversion or fading momentum.
You can only read trend strengths from your price schedules because all indicator information is derived from the price analysis. An upward trend with bare bullish lights and little or no light shadows illustrates a high momentum development.
To use volatility
One must be able to use the knowledge to make real trade decisions. Since reading the current market volatility is only part of the equation.
Bearing it will adjust trading parameters and order placement, volatility is the most important. As a trader, it is better to use wider stops and take winnings to avoid stop-ups and take advantage of major market fluctuations under high volatility. When the volatility is longer, wine placement should be added and a more conservative stop.
Volatility is also used by the professional trades to adjust the size of the location.
In the case of high volatility in the market, loss orders are usually stopped further because market fluctuations are greater. With greater stopping distance, the absolute number of contracts has to be reduced in order to achieve the same percentage risk.
To use momentum
It can be used in many different ways! Below you will find the three most common ones.
1. Identifying trends
Momentum indicators are great in identifying the transition point from range markets to trend markets. It can shift the creation of a trend. How?
A market with a tight area a low momentum that suddenly shows increased light size in one direction as well as an increasing momentum indicator simply shifts the trend.
2. Early warning signals and fading trends
A “hook” on a high ADX or deviations on RSI or CCI can shift potential reversals.
That is, under a trendy torque indicator, signal a weaker momentum. This provides early warning signals about potential trend reversals.
3. The likelihood of price action events.
Momentum information is often used to determine the likelihood of certain events.
An example: We assume that ADX is extremely high and that stochasticity has been bribed over a long period of time. Then it is more likely that the support and resistance level is broken because the torque is high.
Since the price is in a range and the ADX is less than 30, support and resistance levels tend to last. At the same time, the tochastics will of course not be bought-in / handed over for a long time.
Why is it important to undertand the difference between volatility and momentum?
Well, in order for you to make accurate trade decisions and to be able to fully understand market moves. If you, as a trader, understand how to use volatility and momentum information in your trade, it often happens that your business has a high risk risk that can not be managed. It can also hapen that you as a trader enter the markets on the wrong side.
There is a significant risk of loss in futures trading. Important to remember is that past performance is not an indication of future results. You can never look into the future. Placement of contingent orders from you or brokers or trade advisors, such as a “stop-loss” or “stop-limit” order, does not necessarily limit your losses to the intended amounts.
This is due to e-market conditions because they can make it impossible to carry out such orders.