Chapter 14
Estimating Volatility
In This Chapter
Introducing volatility
Doing some volatility calculations
Getting the hang of Bollinger bands
Focusing on volatility breakout as a trading tool
Volatility is a measure of price variation, either the total movement between low and high over some fixed period of time or a variation away from a central measure, like an average. Both concepts of volatility are valid and useful. The higher the volatility, the higher the risk — and the opportunity.
A change in volatility implies a change in the expected price range to come. A volatile security offers a wide range of possible outcomes. A nonvolatile security delivers a narrower and thus more predictable range of outcomes. The main reason to keep an eye on volatility is to adjust your profit targets and your stop-loss to reflect the changing probability of gain or loss.
In this chapter, I describe three ways you can measure volatility and discuss their virtues and drawbacks. Then I describe the most popular way traders incorporate consideration of volatility into their trading plans — the ...
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