Concept of "volatility". Main stages of market waves formation

Volatility (mobility) is an ability of price to change its current value. Volatility takes place when there are high volumes of demand and supply. Another transaction at Forex changes the price that or this way (for example, if all the volume that sellers wanted to sell at the price of 1.37541 is bought it will lead to the increase of ask price and it will reach the 1.37542 level, where new selling are available). The change in price depends on the cooperative work of sellers and buyers.

Let us see on a simple example how and why market "waves" are formed (here it should be mentioned that in reality market waves are formed more difficult way and have more specific stages of development, but our task is to show a simple model, and for more detailed learning it has to be recommended a book about wave analysis and Elliott Wave Principle from the List of Recommended Literature). For example, in some time period there is a point of "balance" of demand and supply at the 1.37500. Suppose in addition to this that there are some new buyers in the market (see "Stage 1", pic. 4).

Picture 4. The development of market wave (simplified)

They set orders for purchase and increase demand. Each purchase leads to the price increase, and if there are many such transactions, then the price starts to grow gradually. At this moment other traders see the increase in price on their monitors and suppose that ascendant movement has began. As a result the simple "viewers" in the past become buyers (bulls). This increase of supply starts to move the price upwards. So-called "ascendant wave" is formed ("Stage 2", Pic. 4).

However, each demand has its limit, and sooner or later it is satisfied. The quantity of buyers that are ready to enter the marker decreases. Some of the traders that wanted to buy, but saw that the price became high enough and was too "high" from their point of view, - refuse to buy. The traders oriented on very short-term time horizon note that they have some profit from their purchase transaction, that was closed later. They start to fix it (it means to sell). All this leads to decrease in demand, and increase in supply. Price rising becomes slower ("Stage 3", Pic. 4).

Delay of price rising reflects at the traders' monitors, and they decide that the "correction" will be possible soon. Either with the aim of fixing or hedging, traders start to increase the volume of sells, and that leads to increase of supply over demand and this, in its turn, price decrease. ("Stage 4", pic. 4).

Such process take place constantly in the market. As the result of this, big and small market movements are formed (the size of the movement depends on the cooperative work of traders and on the quantity of bulls and bears). The result of market movement is the formation of trends (tendencies). We will discuss it later (see ch. 2.3. Trends).

It is clear from the above description that volatility depends directly on the players’ activity. Thus Forex market has certain seasonality. During the trade sessions in different regions the volatility changes. Trade sessions in regions are divided as follows (the time pointed in correspondence to time zone UTC/GMT 0):

  • Pacific Region
    • Wellington - from 20:00 to 05:00
    • Sidney - from 22:00 to 07:00
  • Asia
    • Tokio - from 23:00 to 08:00
    • Hong Kong, Singapore - from 00:00 to 09:00
  • Europe
    • Frankfurt, Zurich, Paris - from 07:00 to 16:00
    • London - from 08:00 to 17:00
  • America
    • New-York - from 13:00 to 22:00
    • Chicago - from 14:00 to 23:00

As you can see from this graphic, there are periods when trade sessions "overlay" each other. At this moment there are the highest quantity of players on the market. This gives rise to the biggest volatility. Here we say "as a rule" because, of course, there are some exceptions. For example, if in the region or the government given the trading platforms are closed because of that or this national holiday, then the volatility at Forex at this time will be much lower, than usually. The same untypical volatility decrease may be overviewed when the market waits for some important macroeconomic news.

Apart from changes in the volatility within 24 hours, there are some other "types" of seasonality. For example, traditionally in the middle of the week (Wednesday, Thursday) the volatility on average is higher than in the beginning or the end. In the middle of the month (on the average) the volatility is higher than in the first or the last days. In summer the volatility is lower than in winter because of mass vacations (traders are people too, they take a rest sometimes). And so on. But we cannot speak about the strict rules here. For example, the first Friday of every month - is a day of issuing of important macroeconomic news like information about job market in the USA (so-called "payrolls"). This makes first Friday "untypical": the market is practically unmoved until the news are issued. As a rule it starts moving faster and stronger after issuing. That is why it is important to understand that it is impossible to make "general rules". The analysis of the context should be made and the corresponding changes should take place.

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