Volatility for MT4 in action during the Bank of Japan meeting

The Quantum volatility indicator captured dramatic price action in the yen pairs during this month’s BOJ meeting. This confirms what had already been signalled in the currency options market. The overnight implied volatility, which is the metric we watch, was at 50% (a six-year high). So a violent price reaction was expected, of which the aud/jpy was one example. As shown on the hourly chart above in the MT4 profile for the pair, we see the relentless move higher and the volatility trigger on the huge up candle. This trigger of the purple arrows happens in real time and warns us that the price action is outside the average true range for this time frame.

Trader reaction is usually FOMO, with many jumping in just as the price is likely to pause or reverse, as in this case. This is a classic trader’s trap. It happens all the time. However, when we read the price action alongside volume, we can spot such traps immediately. For the aud/jpy it’s a case of comparing the volume of the huge volatility candle with the two subsequent candles so we can see the anomalies.  Moreover, the first red candle at the top of this move is a bearish engulfing, so we know a reversal is likely. Finally, the lack of any consolidation or pause following such a violent move tells us the price was always likely to reverse.

By Anna Coulling – creator of volume price analysis