Bollinger Bands, ATR: Volatility indicators and how to use them

Volatility is an essential component of stock markets. It is due to the volatile sessions that more and more participants are inclined to short-term gains, ranging from intraday sessions to weekly expiry. It is, again, the volatility that allows traders to enter and exit at various situations easily. Over time, volatility has also become a hedge tool for various options traders.

It is true that volatility can have an adverse impact on one's trading behaviour, and yet, acknowledging and managing the risk can, on the other hand, can provide significant returns. It is crucial to identify volatile sessions and trade according to the trend. Some well-known indicators like Average True Range, Bollinger Band, and Standard Deviation can assist in this regard.

Average True Range (ATR)

The average true range is arrived at after considering the high, low and previous close. The last 14 sessions are considered to identify the volatility range. The normal range would be high minus low. The results showing high ATR suggest high levels of volatility compared to a low ATR. Short-term traders prefer stock having high ATR to optimise their returns when the opportunity is determined strategically. However, remember that having a bigger time frame provides confusing results. CLICK HERE FOR THE CHART

Standard Deviation

Standard Deviation is a measure to identify divergence of the price from the mean average. The idea is to find the divergence of each session to arrive at the mean, and then correlate it to various sessions to find the range of volatility. Higher the standard deviation, the greater is the volatility. Mid-caps stocks have a higher standard deviation as compared to blue-chip stocks. High-risk traders prefer higher standard deviation compared to defensive traders. One can also look for portfolios comprising both high and low risk stocks to attain gradual returns.CLICK HERE FOR THE CHART

Bollinger Band

Bollinger band is the combination of moving averages and two standard deviation bands -- namely, upper band and lower band. The idea is to find the higher and lower price levels that the stock can hit and identify hurdles based on these bands. The market sentiment may see low volatility when the bands start to contract and may see a surge in volatility as the bands start to widen.  Whenever the price starts to trade beyond the upper band, the volatility is said to be in favour of the bulls. The bear takes full control of volatility when the price falls below the lower band, indicating a strong selling pressure.  The middle moving average acts as the support and resistance for the respective trends. CLICK HERE FOR THE CHART