Commander in Pips: Because of spot Forex structure. You surprise me annoyingly, we've discussed it with details already, and I suggest you re-read comparison of Futures and Spot FX markets as well as Spot FX with equities.
Commander in Pips: This ship has sailed, so for the coming weeks you'll be on probation – two extra duties! Review all those early lessons again and report to the mess hall to clean the dishes.
Commander in Pips: …and will remember about difference of FX Spot and Futures.
So, as we've said, our foundation on trading breakouts is not just a risk management and application of other tools that we've studied but also using some specific indicators that allow us to judge about volatility. If the market shows some solid moves during a short time period then volatility is treated as high, otherwise volatility is low.
Pipruit: And why is it so important?
Commander in Pips: Do you want another extra duty?
Commander in Pips: Then don't interrupt me while I'm explaining the answer to your questions.
Commander in Pips: When you see such kind of price action that is typical for great volatility – big swings and sometimes in both directions, you can just jump in and many traders do that, because it's very attractive to get solid profit in short-term, but this is particularly dangerous since it very often makes it tempting to take high risk trades.
So, our primary task here is not to just follow the volatility and jump in the water with closed eyes. Our first task is to estimate when volatility is low and its growth become very probable. That will give us two advantages – we will be able enter during a calmer time in the market and if some breakout will take place, it will have greater chances to be real, since volatility stands and low levels.
Let's start first from the volatility itself and description of some indicators that allow us to judge about it.
Since we will not deal with options, where volatility is a major parameter, we will take a look at it just lightly. In general, volatility is an average deviation of price from its average value – mean value, during some predetermined period of time. Time period is important, since weekly and yearly volatility could be different and as a rule will be different. Also it is important to base decisions on what particular period volatility is calculated. Since, you can get different numbers if you will calculate volatility based on most recent 15 days, or 15 days before them. Also you can annualize any volatility and express it in terms of a yearly volatility number.