This short “technical” blog post is a follow-up to last week’s Overbought/Oversold blog post. In that post, we concluded that the markets really don’t conceive “overbought” or “oversold” levels. Instead, each given time period (day, week, month), presents a certain regularity in it’s own volatility, and we standardized the measurement with ATR. In today’s post, we will be going down a slightly statistical route, to demonstrate just how regular volatility can be, across time frames, if standardized with the ATR.
Monthy, Weekly, Daily Volatility Distributions
We shall start by observing, at a monthly level, the distribution of GBPUSD’s
- High to Open
- Open to Low
- High to Low
The way I interpret these finding is as follows:
- once we have a positive directional move during the month, it is logical to expect the Monthly High to be around 55% of it’s 12Month ATR. It is illogical to expect more.
- once we have a negative directional move during the month, it is logical to expect the Monthly Low to be around 60% of it’s 12Month ATR. It is illogical to expect more.
- it is therefore logical to exepct Cable to cover anywhere from 80% to 120% of it’s 12Month ATR from High to Low.
And now let’s proceed to observe the weekly distributions:
- once we have a positive directional move during the week, it is logical to expect the Weekly High to be around 60% of it’s 12 Week ATR. It is illogical to expect more.
- once we have a negative directional move during the week , it is logical to expect the Weekly Low to be around 70% of it’s 12 Week ATR. It is illogical to expect more.
- it is therefore logical to exepct Cable to cover anywhere from 80% to 120% of it’s 12 Week ATR from High to Low.
And now let’s proceed to observe the daily distributions:
- once we have a positive directional move during the day, it is logical to expect the Daily High to be around 50% of it’s 20 Day ATR. It is illogical to expect more.
- once we have a negative directional move during the day, it is logical to expect the Daily Low to be around 55% of it’s 20 Day ATR. It is illogical to expect more.
- it is therefore logical to exepct Cable to cover anywhere from 80% to 110% of it’s 20 Day ATR from High to Low.
You may have noticed a certain regularity in the measurements. If we were to measure the pip movement over time, we would get many different readings. By using the ATR, we can reason in a consistent manner, independently from the volatility conditions.
Comparing the Majors
Using ATR has another benefit: it allows us to compare apples to apples. Most currency pairs have similar volatility patterns. So while the benefits of volatility-scaling (via ATR) may not be apparent when comparing currency pairs, it will become evident when trying to compare stocks or commodities with currencies. Currency volatility might be 8% on a good day vs. 30% on a stock. So we cannot compare %-movements. However, by comparing ATR%, everything becomes comparable.
In this light, let’s compare the major currency pairs’ Daily behaviour:
What appears evident is that:
- Cable has higher volatility and a higher ATR coverage.
- Aussie has the lowest volatility and we can’t logically expect more than 70% ATR from High to Low.
- Euro and Loonie have a more regular volatilty distribution, compared to Aussie & Cable, in the sense that there isn’t really a “peak” in the distribution.
- Volatility readings are fairly similar amongst the majors.
Over to You
I’m not strong with statistics despite having fun exploring behavioural patterns. Do you see anything I cannot spot? Here is the data – have fun exploring!
About the Author
Justin is a Forex trader and Coach. He is co-owner of www.fxrenew.com, a provider of Forex signals from ex-bank and hedge fund traders (get a free trial), or get FREE access to the Advanced Forex Course for Smart Traders. If you like his writing you can subscribe to the newsletter for free.