Hi Everyone ,

I have read this idea in Futures and Options Mag, and I thought the same idea is feasible to currency pairs.Please read on:

Volatility is typically measured by standard deviation, a somewhat abstract concept for most investors.Luckily, there are more tangible ways to measure volatility
including a new calculation introduced by Professor Javier Estrada from the IESE Business School in Spain.

Professor Estrada’s volatility measure is called the gainloss spread (GLS), which is easier to understand and is
explained in a recent issue of Active Trader (see “A simpler
volatility measure,” April 2009). This discussion reviews how the GLS is constructed and shows how it can uncover
subtle differences between the volatilities of two underlying
markets that options traders focusing on standard deviation
may overlook. In short, the gain-loss spread can help you uncover trading opportunities that the options-trading crowd neglect.

Gain-loss spread basics

To calculate the gain-loss spread for a stock, first select a historical time period — one year, for example. Next, break
the time period into intervals of 52 weeks. Finally, ask four
simple questions:

1. In how many of the 52 weeks did the stock go up?
2. In how many of the 52 weeks did the stock go down?
3. For the up weeks, what was the average percentage gain?
4. For the down weeks, what was the average percentage loss?

The weekly gain-loss spread is calculated directly from these four numbers:
The probability of gain isestimated as the number of up
weeks divided by 52.
• The probability of loss is estimated as the number of
down weeks divided by 52.
• The gain loss spread is the size of the average percentage gain times the probability of gain,
minus the size of the average percentage loss times the probability of loss.

Is the gain-loss spread useful?

Figure 1 shows a weekly chart ofFlowers Foods, Inc. (FLO) for the 52-week period ending Jan. 30. Figure 2 shows FLO’s weekly percentage price changes over the same period as well as its average weekly percentage gain(green line) and loss (red line).Flowers Foods increased in 23 of the 52 weeks, and it dropped in 29 of those weeks. The average gain for the 23 up weeks was 4.0 percent, and the average loss for the 29 down weeks was 4.2 percent. In calculating the GLS, the average upside gain is weighted by the fraction 23/52, which is an estimate of the probability of gain; the average downside loss is weighted by the fraction 29/52, which is an estimate of theprobability of loss. The GLS is calculated as follows:

Weekly GLS = 23/52 * (4.0%) -
29/52 * (-4.2%) = 4.1%

Estrada’s article provides convincing evidence that the gain-loss spread is at least as good — and in some ways better — than standard deviation as a measure of stock-price volatility. One of its big benefits is simplicity.
Using the GLS, Flowers Foods’ volatility can be expressed as follows: In a typical week, Flowers Foods is expected to vary by 4.1 percent (up or down) from the prior week’s close. That is a simple, tangible statement about volatility.
Using standard deviation, Flowers Foods’ volatility is harder to grasp: The square root of the average quadratic
deviation from Flowers Foods’ arithmetic mean return is expected to be 36 percent.

Painting a volatility picture

Unlike Figure 1, Figure 2 reveals a fingerprint of Flowers Foods’ volatility.What can be learned from studying this
chart? First, the distance between green and red lines is a simple indicator of average volatility.Figure 2’s individual bars represent weekly percentage moves that lead to a certain level of volatility; they arethe spread’s sole components. Bars that exceed the green line indicate
unusually strong weeks. FlowersFoods had only two really strong weeks, one in July and one in October (8- and 13-percent gains, respectively).Bars extending below the red line show losses exceeding the average weekly loss of 4.2 percent. There were 8 such weeks, all of them in the second half of 2008 (three exceeding 10 percent).A pattern of FLO’s volatility emerges over time. Flowers Foods was relatively stable in the first half of 2008 as up and down weeks were evenly distributed and mostly contained within the two average lines. By contrast, the second half of 2008 was much more volatile, especially on
the downside.Weekly GLS charts show price action through a new and different lens. Instead of simply using a standard deviation value for volatility, you are studying underlying information that drives option prices — a deeper level of detail.

I forgot to attach the picture.

This is Prof's link: SSRN-The Gain-Loss Spread: A New and Intuitive Measure of Risk by Javier Estrada

Abstract:
The standard deviation, arguably the most widely-used measure of risk, suffers from at least two limitations. First, the number itself offers little insight; after all, what is the intuition behind the square root of the average quadratic deviation from the arithmetic mean return? Second, investors tend to associate risk more with bad outcomes than with volatility. To overcome these limitations, this article introduces a new measure of risk, the gain-loss spread (GLS), which is both intuitive and based on magnitudes that investors consider relevant when assessing risk. The evidence reported below shows that the GLS is highly correlated with the standard deviation, thus providing basically the same information about risk; and more correlated to mean returns than both the standard deviation and beta, thus providing a tighter link between risk and return

So is this idea is feasible to currency pairs?İs it possible to make a volatility indicator based on above idea? Suggestions are welcome.