- Volatility Indicators
- Standard Deviation
- Bollinger Bands
- Average True Range
What is Volatility?
![](https://p5s3f5f8.rocketcdn.me/wp-content/uploads/2020/07/1-92.png)
- Size and frequency of changes in the price of a security
- The pace at which prices move, and how wildly they swing
- Generally, changes in volatility tend to lead changes in prices
- The higher the volatility, the riskier the security
- Measured using standard deviation and other technical indicators
Standard Deviation
![](https://p5s3f5f8.rocketcdn.me/wp-content/uploads/2020/07/1-93.png)
- The most commonly used tool to measure volatility
- Measures the difference between the actual price and its average value
- The larger the volatility, the higher the standard deviation
- Used to measure the price variation of a security and its relative risk
Standard Deviation - Calculation
![](https://p5s3f5f8.rocketcdn.me/wp-content/uploads/2020/07/1-94.png)
- Calculate an x-period simple moving average
- Determine each period’s deviation (close minus average price)
- Sum the squares of each period’s deviation
- Divide this sum by the number of periods
- Calculate the square root of this result
Standard Deviation - Interpretation
![](https://p5s3f5f8.rocketcdn.me/wp-content/uploads/2020/07/1-95.png)
- Provides an estimate for expected price movements
- Price moves greater than the Standard deviation show above average strength / weakness
- These moves are used to spot overbought or oversold price conditions
Bollinger Bands Indicator
![](https://p5s3f5f8.rocketcdn.me/wp-content/uploads/2020/07/1-96.png)
- Bollinger bands indicator was named by its founder John Bollinger
- A dynamic price channel that follows price movements and accommodates for volatility
- Upper and lower bands are plotted two standard deviations above and below a moving average
- Bands will be wider during increased volatility and narrower during decreased volatility
Bollinger Bands - Calculation
![](https://p5s3f5f8.rocketcdn.me/wp-content/uploads/2020/07/1-97.png)
- Middle Band = 20-period SMA
- Upper Band=20 SMA + 2 standard deviations
- Lower Band=20 SMA – 2 standard deviations
Interpretation - The Squeeze
![](https://p5s3f5f8.rocketcdn.me/wp-content/uploads/2020/07/1-98.png)
- When standard deviation has low values the bands squeeze and come near each other
- When the bands squeeze it provides a signal that a large move, up or down, is to be expected
- A bullish signal is given as the body of one of the candlesticks closes above the upper band
- A bearish signal is given as the body of one of the candlesticks closes below the lower band
Interpretation - “W-Bottom”
![](https://p5s3f5f8.rocketcdn.me/wp-content/uploads/2020/07/1-99.png)
- A “M-Top” forms in an uptrend and indicates to a bearish reversal
- A top forms above the upper band
- There is a correction towards the middle band
- A new top is formed below the upper band
- The pattern is only confirmed after a move below the last bottom
Interpretation - Price Targets
![](https://p5s3f5f8.rocketcdn.me/wp-content/uploads/2020/07/1-100.png)
- Bollinger bands also show whether prices are relatively high or low
- Reaching the upper or lower bands indicates the movement is far-fetched and a correction is expected
- If after reaching the upper band prices cross below the 20 period average, the lower band becomes the target
- If after reaching the lower band prices cross above the 20 period average, the upper band becomes the target
Interpretation - Walking the bands
![](https://p5s3f5f8.rocketcdn.me/wp-content/uploads/2020/07/1-101.png)
- During a strong trend prices can move alongside the bands without correcting in the opposite direction
- This is what is known as “walking-the-bands”
- Strong trending prices will fluctuate between the upper/lower band and the 20-period moving average
- A crossing beyond the moving average alerts for a trend reversal to the opposite side
Average True Range
![](https://p5s3f5f8.rocketcdn.me/wp-content/uploads/2020/07/1-102.png)
- A volatility indicator that was developed by J. Welles Wilder
- Using a volatility formula based only on the high-low range, will fail to capture volatility from price gaps
- Wilder created Average True Range to capture this “missing” volatility
- ATR does not provide an indication of price direction, just volatility
True Range - Calculation
![](https://p5s3f5f8.rocketcdn.me/wp-content/uploads/2020/07/1-103-1024x445.png)
Average True Range - Interpretation
![](https://p5s3f5f8.rocketcdn.me/wp-content/uploads/2020/07/1-104.png)
High ATR values can warn traders of potential market tops and bottoms
Low ATR values indicate ranging markets
Many traders use the average true range as their initial stop loss
A bullish reversal with an increase in ATR shows strong buying pressure and reinforces the reversal
A bearish support break with an increase in ATR shows strong selling pressure and reinforces the support break