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 yet 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 — ...
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