How to Measure Volatility

    Although the traditional way to measure volatility is through standard deviation, there are other ways to measure it too. The other methods that we'll discuss are measuring through moving averages, Bollinger bands, and ATR.

    One tool for measuring volatility is through Bollinger bands. Bollinger bands are calculated using the formula:

    Middle Band = 20-day simple moving average (SMA)

    Upper Band = 20-day SMA + (20-day standard deviation of price x 2)

    Lower Band = 20-day SMA - (20-day standard deviation of price x 2)

    Bollinger bands use three "bands" which give a visual picture of changes in volatility. The bands are easy to interpret, and help you gain a better understanding of your trading environment.

    The way you can measure volatility through moving averages is through divergences of different moving averages. For example, lets say you were to take a short term moving average of 5 periods and a long term moving average of 25 periods. If the two MA's were to suddenly diverge, this could signal a sudden price change. This is because a sharp price change would effect the short term moving average more than the long term one.

    Although it is tough to get exact measurements in volatility using moving averages, it's can be a good guild line, as more divergence means higher volatility.

    ATR stands for average true range, and is the last volatility indicator that we'll talk about. ATR is found by taking the difference between the high and low for each period. This indicator can give you a clearer picture about how a price might change over time, and how volatile it is.


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