Introduction to the Volatility Indicator
Volatility is one of the key elements that allow traders to trade profitably. Without volatility price would not be moving much. This could mean that we do not earn much for our effort.
The Volatility Indicator can be a tool that traders could use to help them decide whether the market is moving enough that it would be worth taking the risk or not.
What is the Volatility Indicator?
The Volatility Indicator is a custom technical indicator which was specifically developed to measure the volatility of the market. This would allow traders to visually observe and objectively identify whether the market has enough volatility for trading or not.
How the Volatility Indicator Works?
Based on the underlying script of the Volatility Indicator, it seems that this indicator bases its measure of volatility on an underlying comparison between an Exponential Moving Average (EMA) and volume.
The indicator then plots histogram bars that displays its measure of volatility. These bars change color depending on the volatility of the market. It plots gray bars to indicate a low volatility market, and blue bars to indicate a high volatility market.
How to use the Volatility Indicator for MT4
The Volatility Indicator has two modifiable variables within its indicator settings labeled as “MaPriod” and “value”.
“MaPriod” refers to the number of bars in which it would base its underlying moving average on, which is an integral part of its measure of volatility.
“Value” on the other hand refers to the threshold in which the indicator would consider the market to be a high or low volatility market. The higher the “value”, the higher the required volatility for the indicator to change its histograms to blue.
This indicator can be used as a volatility filter.
Some traders prefer to trade with high volatility since this would ensure that price is moving significantly and as a result there would be more viable trading opportunities that could produce decent profits. As such, they should trade only when the bars are blue.
Others would try to avoid volatility because of the perceived difficulty when trading in a highly volatile market. In this case they should trade only when the bars are grey.
However, seasoned traders know that it is better to trade when there is enough volatility than when there are none. So, it is best to trade when the bars are blue.
Buy Trade Setup
When to Enter?
Check if the Volatility Indicator is plotting blue bars. Observe if the market is in an uptrend. Enter a buy trade on a valid bullish trade setup. Set the stop loss on the support below the entry candle.
When to Exit?
Close the trade as soon as price action shows signs of a reversal.
Sell Trade Setup
When to Enter?
Check if the Volatility Indicator is plotting blue bars. Observe if the market is in a downtrend. Enter a sell trade on a valid bearish trade setup. Set the stop loss on the resistance above the entry candle.
When to Exit?
Close the trade as soon as price action shows signs of a reversal.
Conclusion
The Volatility Indicator is merely an indicator that provides objective information regarding volatility. It does not provide any trade setups. However, what it does is that it gives us an idea whether the market is conducive for trading or not.
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