Technical indicators help investors to understand market psychology besides demand and supply mechanisms. These indications together form a base for performing in-depth technical analysis. While metrics such as trading volume indicate a price trend’s continuation, indicators generate buying and selling signals. Technical traders and chartists use several indicators, patterns, and oscillators while trading multiple financial markets, including stock, forex, indices, and cryptocurrencies. DMI is also a popular technical indicator used to determine the direction and strength of a price trend. In this piece, we discuss DMI in detail.
What Is DMI Indicator?
Directional Movement Index (DMI) is a technical indicator that helps users determine the asset’s price direction. Founded in 1978 by J. Welles, the technical indicator compares previous lows and highs by drawing positive and negative directional movement lines. Traders sometimes also use the average directional line (ADX) as a third option along with these lines to measure the uptrend or downtrend’s strength.
When +DI exceeds -DI, the price is under more substantial upward pressure. On the other hand, If -DI exceeds +DI, the price is under additional downward pressure. Traders may use this indicator to gauge the trend. Traders might also use lines crossovers as buy/sell signals.
How to Calculate Directional Movement Index (DMI)
Directional Movement (DM) is the most considerable portion of the current period’s price range that sits outside the prior period’s price range. Calculate the DMI for each period.
Positive DMI is equal to High – Previous High
Negative DMI is equal to Previous Low – Low
Reset the smaller of the two numbers to zero, i.e., if +DM is greater than -DM, then -DM = 0. On the inside bar ( a higher low and a lower high), both -DM and +DM have negative numbers; hence you can set them to zero, representing no directional movement for the specific period.
Calculate the True Range (TR) for each period, where:
TR = Maximum of (High – Low) x (High -PreviousClose ) x ( PreviousClose – Low )
Aggregate the -DM, +DM, and TR individually and smooth out using a proprietary smoothing approach developed by Wilder. For smoothing of n period, add 1/n of each period’s value to the total of each period, just like an exponential smoothing.
+DMt is equal to [+DMt-1 – (+DMt-1 / n)] + (+DMt)
-DMt is equal to [-DMt-1 – (-DMt-1 / n)] + (-DMt) (-DMt)
TRt is equal to [TRt-1 – (TRt-1 / n)] + (TRt) (TRt)
Then, calculate negative DI and positive DI as a True Range Percentage as shown below:
+DM/TR x 100
-DM/TR x 100
What Does the DMI Indicator Tell You?
Investors use Directional Movement Index (DMI) to analyze trend direction. Trading signals are crossovers. An uptrend may be underway when the positive DI crosses above the negative DI. On the other hand, a sell signal is generated when the positive DI crosses below the negative DI. When a downturn is underway, traders might initiate a short-term trade.
Traders may also use the indicator for trade or trend confirmation. In this case, the +DI is substantially above -DI, confirming existing long trades or fresh long-term trade indications concerning other entry approaches. If -DI is substantially above +DI, a severe downtrend or short-term positions are confirmed.
How To Read the Directional Movement Index (DMI)?
The DMI is positive when the current price – the previous high exceeds the current low – the previous high. So, if it’s positive, this index is the current high – the previous high.
The reverse is the negative DMI. In this case, the previous low – the current low is greater.
It’s helpful to know the DMI’s theoretical underpinnings. However, that’s not a compulsion anyway. You only need to understand how to employ the indicator when required.
You may notice that the DMI features three lines of varying colors. You may modify the colors to fit your trading style. The yellow-colored ADX line is the most crucial line in the chart above. It tells you what’s going on.
ADX value above 25 indicates a strong trend, whereas ADX having a value below 25 or below suggests there is no significant trend. Likewise, the Redline shows negative DM, while the blue line represents the positive DMI.
How to Use the DMI Indicator?
Traders can find the DMI indicator in toolkits of popular trading platforms, such as MetaTrader & PPRo8. After applying it to a price chart, traders may see three indicator lines: average directional index line, positive DI line, and negative DI line.
The indicator is most often used to gauge a trend’s strength. As a result, it can only be employed in a trending market.
The ADX number is the most typical interpretation. A value above 25 typically indicates a significant trend. Wilder suggested that an ADX of 20 or less indicates no substantial direction.
However, you can always customize these numbers. We know traders that utilized 30 to demonstrate a trend. The chart below is an excellent illustration.
Ensure the chart is going upwards or downwards before using the indicator. This is vital since it won’t work if the underlying asset price fluctuates.
Image Source: TradingView
Please note that the Directional Movement Index (DMI) may not always be correct. Traders should use it in conjunction with other trends, oscillators, and volume indicators. Use methods like candlestick pattern and Fibonacci retracement analysis.
How can Directional Movement Index (DMI) Help Traders Make Profits?
Let’s explore how to evaluate the DMI indicator in-depth and what information it may offer to help you generate higher earnings.
DMI – Trendlines
DMI incorporates the range’s expansion moving average for a specific period, i-e, 14 days. The indicator measure how strongly the price rises upward (+DMI) or downward (-DMI). The two lines show the power of the bulls and bears.
Each DMI has its own line (see Figure 1). Traders first need to identify which line is on the top. Day traders call it the dominating DMI, and it is more accurate and reliable. The lines must cross for sellers and buyers to swap dominance.
A crossing happens when the dominant DMI crosses the DMI on the bottom. While crossovers seem to be a clear indication to go long or short, many short-term traders prefer to wait for additional indicators to corroborate the signals. DMI line crossovers are generally inaccurate, giving misleading alerts during low volatility and late signals during high volatility. Crossovers are the earliest sign of a possible direction shift.
Given above image shows the positive DMI and negative DMI as independent lines. You may notice some false crossings on point one. The dominating positive DMI crossover at point 2 suggests an uptrend.
DMI – Directional Signals
The DMI indicator is used to confirm price action ( Figure 2). The +DMI often moves in lockstep with the price, rising and falling with the price. Notably, the -DMI goes in the opposite direction of price. The -DMI increases when the price decreases and lowers with the price increase. It takes a while to adjust. Remember that a price move’s strength is always captured when peaked in the DMI line.
It’s simple to read directions. The price goes up when the positive DMI rises. On the other hand, when the negative DMI rises, the price starts falling down. But pricing power must also be addressed. DMI strength spans from 0 to 100. The greater the DMI, the more volatile the prices. DMI readings above 25 indicate a strong price direction, while a reading below 25 indicates price weakness.
The above figure shows a choppy DMI at Point 1. With the +DMI over 25 at Point 2, the uptrend continues. At Point 3, +DMI moves in lockstep with price, while -DMI moves in opposition near Point 4.
The ability to view both selling & buying pressure simultaneously is a nice feature of DMI that allows traders to identify the dominant one before opening a position. The strength of bulls (swing highs) is mirrored in the positive DMI peak, while the negative DMI reflects the strength of bears (swing lows). The relative intensity of DMI peaks reveals price momentum and gives timely trading tips. When buyers outnumber sellers, the positive DMI rises above 25, and the negative DMI falls below 25. An upswing is visible here. When sellers outnumber buyers, the negative DMI peaks are above 25, while the positive DMI peaks are below 25. The tendency will be downward.
Price trending hinges on the dominating DMI being strong. A strong upswing will have increasing positive DMI peaks that stay above the -DMI (Figure 3). Strong downtrends are the opposite. In the absence of a dominating force, trend trades are inappropriate since both DMI lines below 25 start moving sideways. The finest trends start after lengthy durations of DMI lines crossing beneath 25. Price will break through support/resistance, and DMI will extend over 25.
In the figure, the positive DMI crosses over 25 at Point 1 and stays above the negative DMI. You may notice that negative DMI did not cross throughout the rise. The buyers ( positive DMI >25) outperform the sellers (negative DMI 25).
DMI lines pivot when the price observes directional change. DMI pivots must have a price correlation with structural pivots. The positive DMI will also have a pivot high when the price does. However, there’s an opposite case with negative DMI since its price pivots low when the negative DMI pivots high.
DMI and price pivots must correlate with interpreting price momentum. Many short-term traders monitor for price and indicator convergence or divergence. Finding fresh pivot highs and +DMI highs is one way to validate an asset’s uptrend. A new pivot low and a new high negative DMI confirm a downtrend. This is a signal to trade the trend or follow the trend breakout.
Divergence occurs when the price and DMI do not agree. For example, when the price rises but positive DMI remains intact. Divergence usually precedes a reversal or retracement and is a risk management indication.
Price and positive DMI both establish fresh highs in the figure above, signifying a long entry. In another case of divergence (Point 2), the price achieves a new high, but the positive DMI does not, resulting in a retracement of the trend at Point 3.
DMI & Volatility
The DMI lines show price volatility. A trend enters a time of consolidation, and then the consolidation undertakes a trend period. Volatility lessens as prices consolidate. Because the buying and selling pressures are about equal, buyers and sellers often agree on the asset’s worth. Once the price has narrowed, it will widen as buyers and sellers cannot agree on a price. When price breaks through the support into a downtrend or bypasses resistance into an uptrend, supply and demand are no longer balanced. Volatility rises as the price seeks a new value level.
When a contraction or expansion range appears, the slopes of the DMI lines shift in opposing ways (Figure 4). Many short-term traders search for occasions when DMI lines diverge, and volatility rises. The more lines divide, the more volatile. Contractions occur when lines move closer together, reducing volatility. Contractions precede retracements.
It’s a downturn’s part in the above figure. Point 2’s contraction causes a reversal that starts with Point 3’s expansion. Price consolidates after Point 4’s contraction.
Limitations of the DMI Indicator
The DMI is a component of the ADX. The DMI trend direction may be combined with the ADX strength measurements. An ADX reading over 20 indicates a significant trend. Whether or not ADX is used, the indicator is prone to false indications.
Notably, positive DI and negative readings and crossings are based on the previous pricing and do not guarantee future results. Unresponsive pricing to a crossing might result in a lost transaction.
A crisscrossed line produces several indications but no price trend. To prevent this, only trade in the greater trend direction by employing long-term price charts, or using ADX readings to identify strong trends.
In line with trend analysis, the price of an asset rises when the pivot highs and lows are rising. The trend remains intact, and the bulls strengthen when price highs are followed by greater positive DMI higher highs. On the other hand, lower pivot highs and lows indicate a decline. When the negative DMI peaks rise, the bears are in charge, and selling pressure increases. When price and DMI agree, you may follow the trend and start managing risk while they differ.
The greatest trading choices are based on data, not emotion. Price and DMI will inform you whether to sell or hold your position. DMI may be used to measure price movement and identify low and higher volatility periods. Irrespective of a bearish or bullish market, DMI has a plethora of information that may help you benefit.
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Charts have always been an essential element for technical analysis. Traders use charts to organize data, extract meaningful information, and make effective trading decisions. Furthermore, dedicating effort to creating clean and easy-to-read charts may help you gain situational awareness and industry insight. Not to mention, colors, layout, typefaces, indicators, and overlays should all be carefully chosen while designing a chart. Today, we’ll discuss Renko Charts in detail.
What Is Renko Chart?
Renko is a type of chart that helps traders filter out small price movements and focus on more significant trends. Renko bricks create these charts after a price moves by a specific value. When a price of an underlying security rises, Renko bricks turn green while they turn red if the price falls. Hence, it becomes easy for traders to determine the price direction. Renko charts are known to be extremely useful in trading trends.
History of Renko Charts
Rice traders created brick charts hundreds of years ago. Instead of recording each price change, the merchants devised a technique to record only significant adjustments. Wisely, they saved time and resources.
The Japanese term Renko means both “brick” and “calm road”. A seamless model price change model with no sudden small movements is the essence of these charts. Traders were creating Renko charts manually on paper. Thanks to modern computing technologies that help traders create them automatically or with minimum manual input requirement.
Renko appeared for the first time in Steve Nison’s book titled “Beyond Candlesticks”. The financial expert detailed the fundamental Renko methods that many traders still utilize while trading Forex.
How Does Renko Chart Work?
Renko charts comprise bricks that move up or down at a 45-degree angle. While the bricks never face each other, traders select the chart’s brick size, and the time for new bricks is determined consequently.
Let’s examine the chart below for the Euro 50 Index to make it more simple to understand. A 35-brick size signifies that the price must move 35 points from the previous brick’s closing price to build new brick in the following direction. Since bricks cannot form next to each other, the price must move 70 points opposite to make a brick. The bricks in this example only emphasize 35-point advances. Notably, price moves of less than 35 points do not form new blocks.
The chart’s timescale is set as D1. So fresh new bricks for the Renko chart will only develop based on the day’s closing price. The price must drop 35 pips below the preceding red brick’s bottom to form another red brick. Because this is a daily time frame, the price might drop 50 points below that level, but no new brick is drawn if it closes fewer than 35 pips beneath the previous red brick.
Traders can change the timescale to anything from a second to a month. Choosing a minute chart means bricks are formed based on the minute’s closing price. Renko charts display price data for currencies, commodities, stocks, indexes, ETFs, and Treasury bills.
Develop an understanding of Renko Charts
Since Renko charts exclude minor price changes, they can effectively identify trends, and even traders can use them as a trailing stop-loss.
For example, the chart above indicates a prolonged upswing from mid-May to early June. Not to mention, the Renko chart never reversed. A trader maintaining this position might have made 385 points (11 x 35) before the appearance of the first red brick, signaling an exit as the downturn had begun.
Then came a prolonged fall in October, possibly signaling traders to short holdings and avoid purchasing. Also, traders who held long positions through green bricks saw steady returns.
But there is a downside as well. Between June and October, the Renko chart looks a bit messy. Trying to purchase or sell based on color or direction changes within this period could end up traders in frustration and financial loss. Therefore, it is always best to use Renko charts in conjunction with price action research and other trading systems rather than employing them individually.
A little about Renko Bars
Renko bricks are sometimes also known as bars or blocks. The name bar stems from bar charts, representing a period like a candlestick chart.
For instance, each bar represents 50 pips in the EUR/USD currency pair, as shown in the example below. We’ve also marked indicators of turbulence and trend reversals.
Comparison of Renko Charts with Other Indicators & Charts
Heikin Ashi Charts VS Renko Charts
Heikin Ashi chart averages recent price moves, whereas the Renko chart emphasizes the overall trend. This candlestick chart uses preceding candle values to provide a smoother average price than standard candlesticks.
The screenshot below displays the differences between them. While the left $1.50 Renko brick illustrates price activity for five months, the Heikin-Ashi chart presents price actions for crude oil for five months.
Candlestick Charts VS Renko Charts
Unlike Renko charts, Candlestick charts concentrate on timing and price information. A new candlestick develops after each specific interval, regardless of the price movement. Assuming at least one transaction in a trading day, a candle forms reflecting the day’s high, low, close, and open prices, as seen below.
On the other hand, Renko charts do not construct a new brick showing the daily high, low, closing, and opening points after every time lapse. Instead, it only produces a new brick after meeting the minimum movement threshold.
Given below are two cotton contracts shown in the graph. The chart on the left utilizes 1.00 Renko bricks, while the one on the right uses daily candlesticks.
How to trade using Renko Charts
Since clients can employ Renko Charts in different trading strategies, let’s go through a few of them below.
Renko chart patterns are comparable to candlestick chart patterns due to similar heads, shoulders, rounded tops/bottoms, triangles, etc. Unlike a candlestick chart, a Renko chart has fewer price changes, making such patterns simpler to notice. You can use different chart pattern scanners to recognize these chart patterns conveniently.
Renko trailing stops
Renko charts can assist traders in riding out a trend until a significant reversal occurs. Long-term trends can result in big gains.
Resistance & Supports
Renko charts assist traders in spotting resistance and support levels that a candlestick or bar chart may not show. A strong resistance level or support zone is indicated by Renko charts turning lower or higher. Traders might take short bets around resistance or purchase near support. In this region, keeping an eye on breakouts in the Renko charts might signal the beginning of a new trend.
Scalping using Renko Charts
A scalping strategy seeks to benefit from minor price swings multiple times a day. Renko charts can show broad trend direction, but they may not always be accurate because the bricks don’t refresh like candlesticks. Hence, using Renko charts for scalping might not be optimal for this method.
However, scalpers might arrange Renko bricks to develop in 30-minute increments or less. However, to emphasize tiny trends and reversals appropriate for scalping, traders can use the Renko charts.
Swing Trading Using Renko Charts
Renko charts can assist swing traders in capturing trends and holding positions until a significant reversal occurs. For example, while the price rises, the Renko chart creates green bricks until a specific size reversal. That’s how swing traders can predict the size of the price reversal. When it happens, they might choose to exit their long positions.
Indicators such as Renko or candlestick charts might operate as trading triggers. Swing traders can also take short positions when the price is stalled at resistance and hold them until the price declines to support or the Renko chart reverses. Not to mention, a comparative approach would be to go long near support.
Renko Chart Limitations
Due to their lack of emphasis on time, Renko charts lack detail. A stock that has ranged for a long time might produce a single box, not telling the entire story. Renko charts may help some traders in such a scenario, but others are likely to suffer.
Renko charts often ignore highs or lows and consider closing prices only. Hence, it omits a lot of pricing data because prices for highs/lows could differ significantly. Although closing prices help traders reduce noise, it can dramatically reduce the price before a new box emerges and warns the trader. By then, avoiding a loss might become too late. Therefore, traders employing Renko charts commonly use stop loss to predetermined levels rather than relying on Renko signals only.
In Renko Charts, sometimes a whipsaw effect occurs, leading to false information, especially when the bricks start changing colors too early due to the chart’s design. That’s why it’s best to use Renko charts as a confluence along with other technical indicators/confirmation signals for the trade setups based on your trading plan.
How to set up Renko Charts on MT4?
MetaTrader 4 (MT4) platform doesn’t come with a built-in feature of Renko Charts. However, customers may download it as third-party tools and indicators. There are multiple Renko chart indicators in MT4’s “CodeBase” tab. You may choose to display the Renko chart as an indication downside of the charting area.
Trading on MT4 with third-party software is risky since the writer’s market knowledge, and coding competence needs to be factored in. It is better to download it from the community website www.mql4.com. (For mt5 check out, www.mql5.com)Furthermore, Renko chart indicators also come with unique setup requirements.
Pros and Cons of Renko Charts
If you employ Renko charts instead of typical bars, you are likely to find them incredibly useful for price analysis. But these charts also have a few demerits of using them. Let’s have a quick look at both pros and cons of Renko Charts below.
1. It becomes pretty easy to determine the market’s trend and trade routes using Renko charts.
2. Renko charts are easy to interpret since the change in color of a chart brick indicates sell or buy.
3. Renko chars are ideal for trading resistance and support regions (including breakouts).
4. Renko charts deliver more vital trading indications than Japanese candlestick charts without evaluating volumes.
5. Renko charts come with easy recognition of visual patterns and generate quality signals.
1. Smoothing reduces both market noise and helpful volatility. As a result, trading only bricks causes issues with leading signal interpretation.
2. The bricks indicate lagging patterns. Each time the latency varies. It is evident during consolidation.
3. It is not feasible to employ indicators directly linked to trade volume and time scale.
Losing trades is part of a trader’s life irrespective of the strategy or chart type. However, traders can always control the risk exposure and how much money they are willing to lose on failing trades. Therefore, adding a stop loss to your trades will be of tremendous significance in managing your risk.
Visit our website to learn how to use different forex trading tools and indicators. In addition to providing educational resources, we also finance traders who can prove their ability. Check out our funding plans if you are interested in trading with a large sum of capital.
Frequently Asked Questions – (FAQs)
What time scale works best for the Renko chart?
There is no specific time for incorporating Renko charts. Instead, you can use them on any time scale. However, short periods benefit the most from these tools since the market noise is typically higher than daily or weekly time frames.
How to calculate Renko Chart?
New bricks emerge when the price moves by more than the size of a brick, as set by the trader or the ATR indicator connected. The chart’s susceptibility to market noise varies depending on brick size.
What are the best indicators that investors should use in conjunction with the Renko indicator?
Renko bricks work nicely with all price movement indicators that ignore trade volume, including Bollinger Bands, RSI, MACD, etc.
How to pick the size of a Renko box?
The appropriate brick size is chosen manually or using ATR based on the asset’s current value. In the latter situation, the market volatility determines the size of a Renko box.
How can I trade Renko charts successfully?
Trend techniques work best when paired with additional indicators and chart pattern analysis. Clients usually trade Renko charts with Japanese candlesticks, called Heiken Ashi.
How does Renko bar work?
The bricks indicate the change in price without volatility. That’s how spotting the pattern becomes much more manageable. Since the bricks are not time-restricted, one brick might be drawn for minutes or days, depending on its size and market activity.
Where can I find the Renko chart in MT4?
Unfortunately, the Renko indicator isn’t a default feature in MT4. But you can get it from third-party resources. You can also find upgraded indicators that indicate bricks as transparent rectangles or even colorful lines.
Volatility refers to the frequency and magnitude of price changes of financial instruments. An asset is said to be highly volatile if its price swings a lot over a short period, such as one day. Contrary to this, there is no volatility if the asset price does not move within a short span. The forex market is known to have increased volatility levels. While volatility help scalpers find multiple trading opportunities and make quick profits, it can also lead them to incur severe trading losses if the market moves unfavorably. In this article, we discuss the most volatile currency pairs in detail.
What are the most volatile currency pairs, and how to trade them?
Traders employ various trading strategies to trade and benefit from the forex market volatility. For instance, standard deviation and price variance help traders predict how much an underlying currency pair will fluctuate over a specific time. Investors can also evaluate FX volatility by observing the currency pair’s true range or the percentage of the spot range. The volatility of different currency pairs varies. The higher a currency pair is volatile, the more significant risk it carries and vice versa. Given below is the list of the most volatile currency pairs.
Australian Dollar/Japanese Yen – AUD/JPY
Canadian Dollar/Japanese Yen – CAD/JPY
Australian Dollar/Pound Sterling – AUD/GBP
New Zealand Dollar/Japanese Yen – NZD/JPY
Australian Dollar/US Dollar – AUD/USD
On the other hand, The liquidity and volatility of other major forex pairs, such as EUR/USD, GBP/USD, USD/JPY, and USD/CHF, are relatively lower. Notably, emerging market currencies, such as the USD/ZAR, USD/MXN, and USD/TRY are known to have the world’s highest volatility levels.
As a result of the inherent risk in emerging market economies, their relative currencies are considered exceedingly volatile. The US Dollar/South African – USDZAR chart below shows how volatile developing market currencies can be, with the USD/ZAR rising by roughly 25% in just over a month. That’s not the first time a currency pair from an emerging market has swung dramatically.
For forex traders, present volatility readings and potential volatility changes hold critical significance while making trades. Traders should also modify their positions according to the currency pair’s volatility. Reducing your position size might become necessary when trading highly volatile currency pairs.
This knowledge helps traders set suitable stop loss (SL) and take profit (TP) limit orders based on volatility. Investors should also understand the key characteristics of the most volatile and least volatile currencies. In addition, traders need to be able to gauge volatility and be alert to any events that could cause it to spike or plummet significantly.
How to measure a currency pair’s volatility?
Traders need to evaluate the volatility of a currency to establish the appropriate position size. Investors can employ various indicators to measure a currency pair’s volatility, including but not limited to the Average true range (ATR), Donchian waterways, and Moving Average indicators. Volatility implied readings, which indicate the predicted degree of volatility obtained from options, are another option for traders to investigate.
Please note that market volatility has several implications for traders.
Important socioeconomic events can significantly affect a currency’s volatility, such as trade wars and Brexit. Volatility can be influenced by data releases as well. An economic calendar can help traders remain on top of upcoming data releases.
Many technical components of trading, such as resistance and support levels, trendlines, and price patterns, still apply to volatile currency pairs. A mix of technical analysis and risk management concepts can help traders cater to the market’s volatility and use it.
Traders need to stay abreast of the latest FX news, research, and rates to anticipate probable volatility shifts. Various online sources provide information related to trading, such as our Academy, helping you make informed trading decisions when dealing with the most volatile currency pairs. Learn more about forex and refine your trading tactics with the help of Traders Central.
Which currency pairs are the least volatile?
When it comes to currency pairs, the most stable currencies happen to be the most liquid ones. This is because, besides being large, these economies are typically more developed. As a result, more trading volume is generated, resulting in a more stable price. Therefore, it shouldn’t be surprising that EUR/USD, EUR/GBP, and USD/CHF are some of the least volatile currency combinations.
According to the chart below, USD/CHF has a low ATR (Average True Range) compared to other currency pairs. You can measure volatility in various ways, including the currency pair’s true range. To determine the FX pair’s volatility, investors can also use the Bollinger Bandwidth (another commonly used technical indicator).
The volatility of two currencies can also have a correlation impact. The more favorably connected two currencies are, the less volatile they may be. Notably, the US Dollar (USD) and Swiss Franc (CHF) are considered safe-haven currencies.
It is not uncommon for the USD and CHF to rise against their sentiment-linked counterparts when the market suffers periods of risk aversion. As a result, the USD/CHF has a low level of volatility.
What is the difference between trading the most and least volatile currency pairs?
Highly volatile currencies tend to move more pips than those with low volatility over a short period. Moreover, trading volatile currency pairs carries excessive risk.
Slippage is more likely to occur when trading high-volatility currency pairings than low-volatility currency pairs.
Trading high-volatility currency pairs necessitate determining the appropriate position size.
How has the FX market’s volatility changed over the previous years?
Over the recent years, bond investors have turned to FX trading, spotting market trends due to a lack of activity in fixed income markets. That became the turning point for the enormous but typically obscure foreign currency markets.
During the COVID-19 outbreak, central banks bought bonds at around $2 billion per hour, crushing volatility and reducing its usefulness as a signaling tool. In addition, the collapse of Interest rate differentials made currency markets more unpredictable than before.
Investors now believe that a currency market alternative is always available if bond markets get shattered. Clients now look upon currencies to predict market moves instead of focusing on the bond market projections. The volatility of numerous currencies, including the US dollar (USD), the Chinese yuan (CNY), the Euro (EUR), and the British pound (GBP), has increased, according to a State Street index of goods prices.
How can investors find updated information concerning possible currency market fluctuations?
Traders can find updated information on multiple financial websites featuring economic calendars, such as FXStreet.com, DailyFX.com, etc. Knowing forthcoming significant event risks can help traders avoid trading mistakes.
Forex traders should know the event risks that affect major currencies. Moreover, investors trade the news because it may enhance short-term volatility. Thus they want to trade news with the most market-moving potential.
Price action and volatility are often driven by:
Monetary policy changes
Economic data surprises
Global leader tweets
Fiscal policy shifts
Economic Calendar covers major events and economic data from the most-traded nations. It helps you determine each event’s relative significance. Traders can also filter out the economic calendar by the level of the potential impact of the upcoming news on the currency market. By choosing “HIGH,” you can see events known for triggering higher volatility in the forex market.
If you explore the Economic Calendar, you’ll see that the most significant events relate to inflation, economic growth, interest rates, retail sales, manufacturing, and consumer confidence. For example, Central bank rates, Labor statistics, Growth (GDP), Balance-of-trade, etc.
All these economic releases’ relevance may fluctuate depending on global events. For instance, Interest rate choices may be the emphasis at one moment but not at another. Therefore, staying abreast of the market is crucial.
To learn more about trading markets, check out our Academy. We have a wide range of educational resources, across all financial markets, including currency, indices, stocks, and cryptocurrencies. We also help competent traders reach their full potential with our funding solutions.
Whether you are an active day trader or have invested some funds in the stock market, you might be aware that the stock market doesn’t open all days a week, limiting the number of trading days each year. This article will debrief how many trading days there are in a year. We’ll also discuss why trading days fluctuate and who defines trading schedules, and what factors can impact how often you trade. But first, let us explain a trading day.
Image Source: Swingtradesystems.com
What Is a Trading Day?
A trading day refers to any day when the stock market is open. Unless there is a big event at a national level, such as National Holiday, the market usually remains open from Monday through Friday. It is worth mentioning that regular trading hours (RTH) are different from electronic trading hours (ETH).
From 9:30 am until 4:00 pm, the Nasdaq and the NYSE exchanges remain open for business. The trading day begins and closes with the bell’s ring in most cases. As soon as the closing bell sounds, all trading ceases and resumes on the next day.
Sometimes the stock market remains closed even on weekdays. For instance, a funeral of a state’s head is a public holiday or a day designated for a state event. Also, the market may shut down at 1:00 pm instead of 4:00 pm due to unavoidable circumstances, like an emergency.
How many trading days are there in a year in the United States?
Usually, a trading year averages 252 days, or 21 days per month and 63 days every quarter. However, the numbers keep fluctuating from year to year. For instance, there were 252/365 trading days in 2019 and 253 in 2020 since it was a leap year. Last year had 252 trading days. March had the most 23, while other months averaged 21 days per month, or 63 days each quarter. Notably, 104/365 days were weekends, besides 09 market holidays in 2021.
Below is the simple equation you may use to find the number of trading days in a year.
Total trading days per year = Trading days – (Weekends + Holidays)
= 365 – (104+9)
Who defines trading hours?
The primary stock exchange in each nation sets the trading timetable for the stock market. The NYSE determines the trading timetable in the US, and most other stock exchanges follow it for both days and hours. In addition to trading hours Monday through Friday, the NYSE practiced a two-hour trading session every Saturday until 1952. However, the NYSE and other US exchanges now stick to Friday – Mon trading schedule.
The New York (NY) time zone is the base of the trading hours. Hence, traders from other time zones must trade during the NYSE’s trading day. These exchanges allow remote trading via electronic platforms, but only during designated market hours. The NYSE remains open between 9:30 am to 4:00 pm ET for those not in the Eastern Time Zone. In California, the market timings are from 6:30 am to 1:00 pm.
Why does the number of trading days vary?
As mentioned earlier, the number of trading days varies annually. This variation can be due to holidays, weekends, leap years, or significant events. Let’s have a quick look at each of the listed variables.
In 2021, the US had several federal holidays like Columbus Day and Veterans Day. However, the stock market didn’t close on all of them except the Good Friday, a non-government holiday. The stock market has nine annual holidays in the year, which are as follows:
Jan 01, 2021 – New Year’s Day
Jan 18, 2021 – Jr. Martin Luther King’s Day
Feb 22, 2021 – Presidents’ Day
Apr 02, 2021 – Good Friday
May 31, 2021 – Memorial Day
Jul 04, 2021 – Independence Day
Sep 06, 2021 – Labor Day
Nov 25, 2021 – Thanksgiving Day
Dec 25, 2021 – Christmas Day
Note: The stock market observed any holiday falling on a weekend on the last day of the previous week or the first day of the following week.
As stated previously, the US market has nine official holidays, and you might wonder why the number of trade days changes when the same number of holidays are honored each year? The answer is in the number of weekends every year.
Yearly weekend days vary based on when the year’s first-weekend fall. Even though it’s a leap year, business days get reduced if the year begins on a Saturday.
The stock market might close unexpectedly due to major national events not foreseen in the trading schedule. For example, on Dec 05, 2018, the US stock market closed to mourn former President (George H.W. Bush). The market also remained closed in 2012 for two days due to Hurricane Sandy and four days in 2001 due to the terrorist attack on Sep 11, 2001.
Leap years have one extra day every four years. This extra day increases the total number of trading days per year. For example, 2020 had 253 trading days. However, a weekend starting on Saturday can prevent a leap year from adding an extra trade day.
Do you trade every day?
Since now you know how many trading days are there in a year, you might ask if you can trade on each one? Even for day traders, that isn’t certain. Factors that generally restrict the number of business days each year include.
Important family reunions, dental appointments, illness, or other occasions might keep you from trading. Therefore, the chances are that you might not be able to trade, even if you wish.
A devastating defeat or a losing streak usually necessitates some time off. Doing so allows you to de-escalate and restore emotional control.
Being a day trader is demanding, especially when constantly checking your trading screen for excellent trade setups and maintaining open positions. Vacation time is quite beneficial but will undoubtedly decrease your trading days.
If you are a day trader, you probably find yourself entering trade setups on almost all trading days. However, that might not be the case for swing traders. They won’t trade on all trading days unless they find setups that fit their plan, which may not be that frequent.
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Technical indicators help traders to analyze past market trends and forecast future developments. While some traders develop personal indicators, usually with a programmer’s help, others rely on existing ones. As a result, indicators like the moving average and stochastic oscillator, or bespoke indicators, are becoming more popular among traders. ATR is also a widely used indicator that helps analysts determine market volatility. This article discusses the ATR indicator in detail.
What Is the Average True Range (ATR)?
Founded by American technical analyst J. Welles Wilder in 1978, Average True Range (ATR) is a volatility indicator that displays how much an asset changes on average. The technical indicator may assist day traders in deciding whether to enter a trade and where to set stop-loss order. Analysts calculate it by dividing the price range of an underlying asset over a specific period.
How Does Average True Range (ATR) Indicator Work?
The ATR indicator swings up and down when an asset’s price changes. Each period generates a fresh ATR measurement. For instance, the ATR is calculated daily on a one-day (D1) price chart, while it shows the ATR value every minute on a one-minute (M1) time frame.
Formula For ATR Calculation
ATR measures volatility by accounting for price gaps. Typically, traders calculate ATR using 14 periods, such as Minute (M1), Hour (H1), Day (D1), Week (W1), or Month (MN). Each one can calculate ATR. We have the following formula to calculate ATR.
The TRi represents a particular true range in this formula, and “n” shows the relevant period.
How to calculate the Average True Range (ATR)
Finding a security’s actual range value is the initial step in determining ATR. A security’s price range is just its high minus low. Traders can produce more trading signals by employing shorter periods, whereas longer intervals provide fewer indications.
For instance, if you are a short-term trader and want to look at a stock’s volatility over five trading days, you might compute the five-day ATR. Then, for each price range, you determine the absolute maximum of each, such as current high-current low, current high- previous close, and current low-previous close. That’s how you calculate ATR for the most recent 05-days and then average the value to find the first value of 5-day ATR.
What does Average True Range (ATR) Indicator Tell You?
Wilder created the ATR to employ it in the commodity market, but it is equally helpful to trade equities and indexes.
The ATR is a valuable tool for market technicians to initiate and exit trades. Its primary purpose was to help traders calculate an asset’s daily volatility more precisely. However, traders mostly use it to assess volatility generated by gaps and restrict up or downswings.
Traders typically employ ATR to exit a trade regardless of the entry point. One of the popular strategies is called the chandelier exit strategy developed by Chuck LeBeau. The chandelier exit establishes a trailing stop below the stock’s highest high since you opened a position.
In simple terms, the distance between the highest high and the stop level is the multiple of ATR. For example, you can deduct three times the ATR from the trade’s highest point since you entered.
The ATR may also help traders decide how much to trade in a derivates market. The ATR technique to position size can account for both the trader’s risk tolerance and the market’s volatility.
Example of Using the Average True Range (ATR)
Assume the five-day ATR starts at 1.41 and ends at 1.09. You can estimate the sequential ATR by multiplying the former ATR value with the number of days minus one and then adding the current period’s actual range.
Now divide the total by the chosen period. For instance, [1.41*(5 – 1)+(1.09)]/5 is expected to be the second ATR value. You may then use the formula throughout the entire timeframe.
ATR can not predict the breakout direction, but you can add it to the closing price, which will help you enter a buy position if the price rises over that figure the next day, as shown below. Rare trading indications generally mark big breakthrough moments. According to this theory, a price closing the ATR above the previous close indicates a shift in volatility. Buying a stock means you expect it to rise.
Limitations of Average True Range (ATR) Indicator
The ATR indicator comes with two significant limitations.
Being a subjective measure, ATR remains open for interpretation. No ATR measurement can tell you if a trend is poised to reverse or continue in the same direction. Instead, you must compare ATR values to previous readings to gauge a trend’s intensity.
ATR gauges volatility, not price direction, and may produce confusing signals, especially when markets or trends pivot. For example, a quick rise in the ATR after a strong move against the market trend may cause some traders to believe the ATR supports the previous direction when this is not the case.
Unlike RSI or MACD, ATR isn’t a trend indicator. Instead, it’s a volatility indicator that shows the degree of interest or indifference in a move. Large ranges, or True Ranges, typically accompany strong movements. Uninspiring maneuvers might have limited spans. As a result, traders may utilize ATR to verify a market move or breakout. A rise in ATR would imply significant buying pressure and confirm a bullish reversal. A bearish support breach with an increase in ATR would ensure the support break. Like other indicators, ATR can also lead to false interpretation, and traders must not depend solely on it. Therefore, it’s usually best to use along with technical tools and indicators for additional confluence.
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Frequently Asked Questions (FAQs)
Which indicator works best with the ATR indicator?
The Average True Range measures volatility. However, It is typically neglected as a market indicator since it indicates price action strength. Bollinger Bands are well-known indicators that may work the best with ATR.
How is Average True Range (ATR) helpful for traders?
Being a volatility indicator, ATR offers you an idea of how much the market may change. Day traders can use ATR with different technical indicators and strategies to find optimal entry and exit positions.
Which number is more suitable for the Average True Range (ATR) indicator?
Although it isn’t the only technique, the conventional ATR indicator number is 14. You can also consider using a lower number to emphasize recent volatility. More significant numbers allow long-term investors to measure more.