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What is Average Pip Movement?
Average pip movement is simply the average amount of pips by which the price of a Forex currency pair or cross moves in a given amount of time. It is represented by the Average True Range indicator which shows the average pip movement over whatever length of time it is set to. For example, if the Average True Range indicator is set to 20, and applied to a daily chart, the amount shown by the indicator will represent the average daily pip movement over the past 20 days. There is no reason why this indicator cannot be usefully applied to any other time frame, from the 1 minute to the 1-month charts. This indicator tends to be overlooked by less experienced traders, which is unfortunate, because it can be usefully applied to pick both trade entries and trade exits, as well as to select which currency pairs to trade.
To explain why average pip movement (also called “volatility”) is so useful, we must understand why there is an edge in volatility studies, and what that edge is.
Just as studies of the directional movement of historical prices can indicate the more likely future direction movement by identifying trends or deviations from averages, so can studies of historical volatility indicate the most probable level of future volatility. Academic studies of volatility have shown that the level of volatility tomorrow is likely to be close to the level of volatility today.
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