Quick Look At The Term Volatility Risk
Economic data points are not created equal, this video explains why and how it can help you in your trading.
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We have Carlos here with a question, asking what exactly we mean with the term volatility risk in some of our risk event outlook reports. Now, thanks for the question, Carlos.
For those of you that hasn't seen this before, what Carlos is referring to is whenever we have a major upcoming event, like a central bank meeting or a major economic data point, we usually prepare a risk event report or risk event outlook report for that event.
Now for these events, we will have a volatility risk measure that measures the expected volatility on a scale from obviously zero to 100%. Now the higher the number, the more market moving the event will potentially be and the lower the number, the less market moving the event will potentially be.
So looking at just a normal economic calendar, often you'll see things like CPI and NFP and GDP data always marked as very important or high impact events, but the potential impact of a news event will always be determined, not just by the fact that it's NFP, but it'll be determined on the expectations going into the event, whether it's a highly anticipated event, whether the current sentiment in the market and the fundamentals or the bigger picture, macro fundamentals are really gonna be focused on that event or not.
So for example, inflation data, it's always an important print, but if inflation is running low and has been running low for a while, if we've already seen a central bank reacting to it by cutting rates in accordance, and we know that the short and the long run inflation expectations are low, then one more CPI print, for example, just isn't gonna be that market moving. It might not be enough to move the needle, unless of course you see a huge spike in inflation.
That situation can of course then go against the overall market expectations, which can be market moving, but it really depend. The expected volatility for an event does depend on the anticipation of it, the expectations going into it, and as we say, the current market sentiment at that time.
So some events will be more and less market moving. And that is how you can use that volatility risk measure. So if the volatility risk is 40%, for example, it shows that yes, it's important, but it might not be very market moving. And if the volatility, like the FMC, for example, if it's at 80% or 90%, then you know, okay, this is not only important, but it's also gonna be possibly a very market moving event based on the anticipation and expectation and the market sentiment.
So, Carlos, I hope that helps. As usual, any other questions, don't hesitate to let us know.
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If you find this content helpful, you’ll love Forex Source.
There’s a link below were you can learn more about it
https://bit.ly/2HFykNd
----
We interpret and explain price moves in real-time, 24 hours a day. Our team of analysts produce text, video and audio commentary.
You understand the markets and trade with confidence. Learn more at our website here: https://bit.ly/2HFykNd
-----
We have Carlos here with a question, asking what exactly we mean with the term volatility risk in some of our risk event outlook reports. Now, thanks for the question, Carlos.
For those of you that hasn't seen this before, what Carlos is referring to is whenever we have a major upcoming event, like a central bank meeting or a major economic data point, we usually prepare a risk event report or risk event outlook report for that event.
Now for these events, we will have a volatility risk measure that measures the expected volatility on a scale from obviously zero to 100%. Now the higher the number, the more market moving the event will potentially be and the lower the number, the less market moving the event will potentially be.
So looking at just a normal economic calendar, often you'll see things like CPI and NFP and GDP data always marked as very important or high impact events, but the potential impact of a news event will always be determined, not just by the fact that it's NFP, but it'll be determined on the expectations going into the event, whether it's a highly anticipated event, whether the current sentiment in the market and the fundamentals or the bigger picture, macro fundamentals are really gonna be focused on that event or not.
So for example, inflation data, it's always an important print, but if inflation is running low and has been running low for a while, if we've already seen a central bank reacting to it by cutting rates in accordance, and we know that the short and the long run inflation expectations are low, then one more CPI print, for example, just isn't gonna be that market moving. It might not be enough to move the needle, unless of course you see a huge spike in inflation.
That situation can of course then go against the overall market expectations, which can be market moving, but it really depend. The expected volatility for an event does depend on the anticipation of it, the expectations going into it, and as we say, the current market sentiment at that time.
So some events will be more and less market moving. And that is how you can use that volatility risk measure. So if the volatility risk is 40%, for example, it shows that yes, it's important, but it might not be very market moving. And if the volatility, like the FMC, for example, if it's at 80% or 90%, then you know, okay, this is not only important, but it's also gonna be possibly a very market moving event based on the anticipation and expectation and the market sentiment.
So, Carlos, I hope that helps. As usual, any other questions, don't hesitate to let us know.
-----
If you find this content helpful, you’ll love Forex Source.
There’s a link below were you can learn more about it
https://bit.ly/2HFykNd
