Volatility Indicators

Volatility indicators tell you about risk and opportunity. High volatility means bigger potential gains but also bigger potential losses.

Bollinger Bands

What it is: A volatility channel around a moving average (typically 20-period SMA ± 2 standard deviations).

Components

Component	Calculation	Purpose
Upper Band	SMA + (2 × StdDev)	Resistance
Middle Band	20-period SMA	Mean
Lower Band	SMA - (2 × StdDev)	Support

Signals

PRICE AT UPPER BAND: Potentially overbought
→ May pull back to middle band
→ Score: +1.5 bearish

PRICE AT LOWER BAND: Potentially oversold
→ May bounce to middle band
→ Score: +1.5 bullish

BOLLINGER SQUEEZE: Bands narrow significantly
→ Low volatility, big move coming
→ Score: Alert (no direction bias)

Bandwidth

Bandwidth measures how wide the bands are:

Bandwidth = ((Upper - Lower) / Middle) × 100

Bandwidth	Volatility	Implication
< 10%	Very low	Squeeze - big move coming
10-20%	Normal	Standard conditions
> 20%	High	Volatile, use smaller positions

Trading the Squeeze

When bandwidth drops below 10%, a big move is coming. The direction is unknown, but you can prepare:

1. Watch for breakout above upper band (bullish)
2. Watch for breakdown below lower band (bearish)
3. Use other indicators to confirm direction

Best for: Identifying price extremes and volatility conditions

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ATR (Average True Range)

What it is: Measures volatility by calculating the average range between high and low prices.

Calculation

True Range = MAX of:
  - Current High - Current Low
  - |Current High - Previous Close|
  - |Current Low - Previous Close|

ATR = Average of True Range over N periods (typically 14)

Uses

1. Position Sizing

Higher ATR = More volatile = Smaller position

Position Size = Risk Amount / ATR

Example:
Risk Amount: $500
ATR: $2.50
Position Size: 200 shares

2. Stop-Loss Placement

Stop Type	Calculation	Use Case
Tight	Price - (1 × ATR)	Scalping
Normal	Price - (2 × ATR)	Swing trading
Wide	Price - (3 × ATR)	Position trading

Example:
Entry Price: $100
ATR: $3

Tight Stop: $97 (1 ATR)
Normal Stop: $94 (2 ATR)
Wide Stop: $91 (3 ATR)

3. Volatility Assessment

ATR % of Price	Volatility Level
> 5%	Very high
3-5%	High
1-3%	Normal
< 1%	Low

ATR in Our System

We provide suggested stop-loss levels based on ATR:

{
  "atr": 2.45,
  "atrPercent": 2.1,
  "volatility": "normal",
  "suggestedStops": {
    "tight": 115.55,    // 1x ATR
    "normal": 113.10,   // 2x ATR
    "wide": 110.65      // 3x ATR
  }
}

Best for: Position sizing, stop-loss placement, and volatility-adjusted risk management

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Volatility-Based Position Sizing

Combine ATR with your risk tolerance:

Step 1: Determine your risk per trade (e.g., 2% of portfolio)
Step 2: Calculate dollar risk = Portfolio × 0.02
Step 3: Calculate shares = Dollar Risk / (2 × ATR)
Step 4: Calculate position size = Shares × Entry Price

Example

Portfolio: $100,000
Risk per trade: 2% = $2,000
Entry Price: $50
ATR: $2.50
Stop-Loss: 2 × ATR = $5

Shares = $2,000 / $5 = 400 shares
Position Size = 400 × $50 = $20,000

This ensures you never lose more than 2% on any single trade, regardless of the stock's volatility.

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Summary Table

Indicator	Signal Type	Bullish Score	Bearish Score
BBands Oversold	Extreme	+1.5	-
BBands Overbought	Extreme	-	+1.5
Bollinger Squeeze	Alert	-	-

Note: ATR doesn't generate buy/sell signals directly. Instead, it's used for:

• Position sizing
• Stop-loss placement
• Risk management

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