A Handbook of Technical Analysis: The Practitioner's Comprehensive Guide to Technical Analysis

CHAPTER 21

Volatility Analysis

LEARNING OBJECTIVES

After studying this chapter, you should be able to:

• Understand the basic measures of central tendency, dispersion, and their associated geometrical representations
• Employ the five measure of volatility to determine market behavior
• Distinguish between trend and range volatility measures
• Identify volatility when it appears in price, oscillators, and overlay indicators
• Describe the various volatility-based indicators and how they can be used to forecast potential market tops
• Identify volatility cycles in the market
• Compare and contrast the different applications of ATR as a filter of volatility or market noise

The ability to gauge the degree of market volatility is crucial to any forecast or to trading decisions. Volatility impacts the degree of risk in investments, so it is an element of market behavior that should be mastered. In this chapter, we will cover the various measures for gauging volatility in the markets.

21.1 THE CONCEPT OF CHANGE AND VOLATILITY

There are many ways to measure or quantify volatility. Depending on which mode of measure is employed, different aspects of price-action volatility will be quantified. Price action may be characterized by the following five measures of volatility:

1. The change in the rate of change in price over a specified duration
2. The maximum amount of price change over equal durations
3. The number of prices fluctuations over equal durations
4. The degree of interval activity over equal durations ...