Intraday volatility has a shape, and the shape matters

[Amanhasnoname]

Volatility during the day follows a pattern that repeats from day to day. In forex, it is not the equity-style U shape but a multi-peak profile aligned with sessions: low in the late New York and early Asian hours, rising at Tokyo and London, peaking in the London-New York overlap, and decaying into the evening.

Plotting average absolute returns by minute of the day for a pair across several months reveals the shape. Peaks correspond to regular events like data releases and market opens.

This shape can be used to normalize signals. A move of three pips means something different at 03:00 than at 13:30. Dividing by the typical volatility for that time puts moves on a comparable scale.

It also supports dynamic targets. Targets can scale with the expected volatility for the time of day, becoming larger during active periods and smaller in lulls.

Without such normalization, a system implicitly treats all minutes as equally informative, which they are not.

The profile is stable enough to be useful, but should be updated periodically.

How different are the volatility levels between the least and most active hours for the pair being traded?