Using Volatility Indicators in Technical Analysis
When it comes to using technical indicators in technical analysis, most indicators take into account the price and volume. However, because some markets are just so volatile like the commodities market, there are also indicators that take into account the price volatility. Among the most common used indicators that take into account price volatility are the average true range (ATR) and the Bollinger bands.
The Average True Range (ATR)
The Average True Range (ATR) is an indicator used to measure price volatility. The creator J. Welles Wilder created this indicator specifically for commodities in mind due to commodity prices are more volatile than stocks, and that they are subject to price gap moves - a significant price movement between two trading sessions.
Although this is one of the indicators in Technical Analysis, it is not a leading indicator to forecast trend direction but rather the ATR is used to see how much raw movement there is in prices. In this manner, it reflects the interest or the disinterest in price movements or price volatility. The frequently used ATR setting is 14 days.
The two rules you need to remember with ATR are as follows:
(a) When the prices are more volatile, the ATR moves up.
(b) When the prices are less volatile, the ATR moves down.
There are a number of traders who use the ATR to determine a stop loss position as well. When the market is more volatile, it is an indicator for a reverse position.
The Bollinger Bands
The Bollinger Bands is a technical indicator proclaimed by some traders to have played a key part in successful trading strategies.
Similar to the Average True Range (ATR), the Bollinger Bands also measures the volatility of the market and is not used as a Leading Indicator or Trend Reversal Indicator.
The Bollinger bands are indicated with three (3) bands on the chart - the upper band, the middle band and the lower band.
• The upper band is the middle band + 2 standard deviations.
• The middle band is the 20-period Simple Moving Average (20-SMA).
• The lower band is the middle band - 2 standard deviations.
The concept of interpreting the bands is that if the market is less volatile, the bands will tend to tighten or contract. If the market prices are more volatile, then the bands will expand or widen.
Some traders have also used the Bollinger bands as support and resistance levels for market prices. Thus, the upper band will become the resistance level and the lower band will become the support level.
The Average True Range (ATR)
The Average True Range (ATR) is an indicator used to measure price volatility. The creator J. Welles Wilder created this indicator specifically for commodities in mind due to commodity prices are more volatile than stocks, and that they are subject to price gap moves - a significant price movement between two trading sessions.
Although this is one of the indicators in Technical Analysis, it is not a leading indicator to forecast trend direction but rather the ATR is used to see how much raw movement there is in prices. In this manner, it reflects the interest or the disinterest in price movements or price volatility. The frequently used ATR setting is 14 days.
The two rules you need to remember with ATR are as follows:
(a) When the prices are more volatile, the ATR moves up.
(b) When the prices are less volatile, the ATR moves down.
There are a number of traders who use the ATR to determine a stop loss position as well. When the market is more volatile, it is an indicator for a reverse position.
The Bollinger Bands
The Bollinger Bands is a technical indicator proclaimed by some traders to have played a key part in successful trading strategies.
Similar to the Average True Range (ATR), the Bollinger Bands also measures the volatility of the market and is not used as a Leading Indicator or Trend Reversal Indicator.
The Bollinger bands are indicated with three (3) bands on the chart - the upper band, the middle band and the lower band.
• The upper band is the middle band + 2 standard deviations.
• The middle band is the 20-period Simple Moving Average (20-SMA).
• The lower band is the middle band - 2 standard deviations.
The concept of interpreting the bands is that if the market is less volatile, the bands will tend to tighten or contract. If the market prices are more volatile, then the bands will expand or widen.
Some traders have also used the Bollinger bands as support and resistance levels for market prices. Thus, the upper band will become the resistance level and the lower band will become the support level.
