If you want to be a successful FX trader you need to understand the concept of Forex volatility and it's impact on prices but the fact is most new traders don't understand the concept of Forex volatility trading but if you do, you can gain an edge which can lead you to bigger Forex profits.

To understand volatility you need to understand standard deviation of price greater detail – so what is standard deviation of price? Let's define it

Standard Deviation of Price Defined

Standard deviation is a statistical term that provides an indication of the volatility of any price and that includes Forex prices and measures how widely values (closing prices) are dispersed from the mean average. Dispersion is defined as the difference between the actual value (closing price) and the average value (mean closing price).

Therefore, the bigger the difference is between the closing prices and the average price, the higher the standard deviation or volatility of the currency pair you are studying will be. On the other hand,the closer the closing prices are to the average mean price, the lower the standard deviation and the volatility of the currency pair will be.

Standard deviation is calculated by taking the square root of the variance, the average of the squared deviations from the mean

So What Use is Standard Deviation for Forex Traders?

Here are some of the advantages an understanding of standard deviation can give you in terms of increasing the profits of any currency trading strategy.

Spotting Major Tops and Bottoms

Major tops and bottoms in any financial market are accompanied by high volatility as investors reflect the psychology of greed or fear and push prices to far to quickly, before prices come back to more realistic levels. All short term price spikes don't last long and while they can be used to spot major tops and bottoms, they can also be used to spot:

Overbought or Oversold Levels in Relation to the Prevailing Trend

Any trend as it evolves, will see short term price spikes to overbought or oversold levels and then, prices will come back to the trend line. If you understand volatility and use moving averages to spot fair value in relation to the trend, you can sell when prices become over bought and buy back, to a fair value moving average.

Changes From Low Volatility to High Volatility

If a market is trading in a tight range, volatility will tend to be low but when it breaks from the range and volatility increases, it can used as a warning sign that a new trend is about to start and traders can use their technical analysis to look to enter trading signals.

The Perfect Volatility Indicator – Bollinger Bands

If you want a visual tool you can use to spot standard deviation of price, then you should check out Bollinger Bands. This is a very effective indicators which can be used to see how volatile a Forex pair is and can be used to set up some high reward low risk trades which can be confirmed by other Forex trading indicators.

If want to win with your Forex trading system, you need to understand standard deviation of price and if you do, you will find that it will enhance your profit potential and reduce risk which is something all FX traders want to achieve.