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Chapter 20, Part I. Intro to Breakouts and Fakeouts Page 5

Discussion in 'Complete Trading Education- Forex Military School' started by Sive Morten, Dec 21, 2013.

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  1. Sive Morten

    Sive Morten Special Consultant to the FPA

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    Volatility by Bollinger Bands

    This indicator is much better at showing volatility level. Although it shows variance not of deviations but price itself, still even this way could give some information about volatility. Since we’ve talked about this indicator much, I just want to remind you how it works. In fact it calculates standard deviation from mean value during some period that you appointed in parameters of this indicator. The bands shows +1deviation (upper band) and -1deviation (lower band) from average price, i.e. MA. Also you can choose how many deviations you would like to apply and to see on the chart. When volatility reduces, then the value of deviations itself becomes smaller, hence, the bands range become tighter. Once volatility starts to increase and price movement is stronger and stronger deviates from average – the value of deviation itself also increases, and, hence the range between bands becomes wider. How can it us? When band range ultimately contracts – it tells us that volatility is low and if your analysis tells that the market could show some breakout, then, probably this breakout has nice chances to be true. When range is expanded or already stands wide, it tells us that volatility is solid already, and it could lead to fake out just due great amplitude of current market swings.

    Average True Range

    This is another useful indicator for estimating volatility on the market. It’s not normalized and takes the moving average of the true range over the specified period:

    True Range = True High - True Low.

    True High = The greater of the current bar's high or the close of the previous bar.

    True Low = The lesser of the current bar's low or the close of the previous bar.

    This indicator can easily replace Historical Volatility indicator. Besides, it’s much simpler. Usually this indicator is applied to longer time frame charts – daily and longer. The most common parameters are: 5; 13; 21; 55 or 65.
     
    #1 Sive Morten, Dec 21, 2013
    Lasted edited by : Apr 23, 2016
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