The Quantum volatility indicator captured dramatic price action in the yen pairs during this month’s BOJ meeting, confirming what had already been signaled in the options market for the currency. The overnight implied volatility, which is the metric we watch, was at 50% (a six-year high), so violent price action was expected, of which the aud/jpy was one example. As we can see on the hourly chart featured above on the MT4 profile for the pair, we can 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 one of FOMO, with many jumping in just when the price is likely to pause or reverse, as in this case. This is a classic trader trap and happens all the time. However, when we read the price action in conjunction with the 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