Measuring Volatility

Been looking at volatility today, specifically some indicators to measure it. Volatility in my ever so simple view is a measure of how much price is jumping up and down over the time i've set, be it days, months, hours, etc.. Depending on the scenario you're looking for, high volatility can be a good thing as price moves quickly in your favour or a bad thing if it reverses and slaps you in the face before you've had time to make a coffee. Personally i'm looking at breakout trading today, where price is about to "breakout" of a channel. This seems to involve volatility moving from a low point to a high and the indicators to watch.

So what can we use to get an idea of volatility? Here ya go.

Moving Averages
Let's chuck a 20 day simple moving average on a daily chart. As you look back over the last few weeks take note of the times price has clung to the moving average and the other times it's shot wildly above or below it. How do those swings up and down compare to the last few days? is price movement more or less volatile?



Bollinger Bands
Adding Bollinger Bands to your chart can give you a nice indicator of volatility. Look at the times when the top and bottom bands are close together. When the bands are contracted together like that price is less volatile. When the bands start to spread out, boosh! Along comes some volatility and some funky moves in price to match.




ATR (Average True Range)
Take a look at the blue line at the bottom of this chart. It's the ATR and gives us the average trading range over the time you specify. Usually the platform used will ask the period you wish to calculate the ATR over, e.g. on a daily chart and you set it to 20, then you'll get the average true range over the last 20 days.

On the example below we show the ATR over 10 days of the USDJPY pair, when the ATR is going down it's an indication that volatility is decreasing and when it goes up, well you can guess the rest.