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Volatility Indicators

Volatility indicators measure the rate and magnitude of price changes, helping traders identify breakouts, set appropriate stop losses, and adjust position sizes based on market conditions.

Bollinger Bands

Calculation

Bollinger Bands consist of a middle band (SMA) and two outer bands that are standard deviations away from the middle band.

Formula:

Middle Band = SMA(n)
Upper Band = SMA(n) + (k × Standard Deviation)
Lower Band = SMA(n) - (k × Standard Deviation)

Standard Settings:
- Period (n) = 20
- Standard Deviations (k) = 2

Step-by-Step Example (20-period, 2 StdDev):

Step 1: Calculate 20-period SMA
Prices: 100, 102, 101, 103, 105, ..., 110
SMA(20) = 104.50

Step 2: Calculate Standard Deviation
Deviations from mean: -4.5, -2.5, -3.5, -1.5, 0.5, ..., 5.5
Variance = Sum of (deviation²) / 20 = 8.25
StdDev = √8.25 = 2.87

Step 3: Calculate Bands
Upper Band = 104.50 + (2 × 2.87) = 110.24
Middle Band = 104.50
Lower Band = 104.50 - (2 × 2.87) = 98.76

Characteristics

Middle Band: 20-period SMA (standard)
Outer Bands: ±2 standard deviations (standard)
Band Width: Indicates volatility level
Price Position: Shows relative price level
Best For: Mean reversion and breakout strategies

Band Width Interpretation

Band Width	Volatility	Market Condition	Strategy
Narrow	Low	Consolidation	Prepare for breakout
Normal	Medium	Trending	Trend following
Wide	High	Volatile	Mean reversion
Expanding	Increasing	Breakout starting	Follow momentum
Contracting	Decreasing	Consolidating	Wait for setup

Price Position Interpretation

Price Position	Signal	Action
Above Upper Band	Overbought	Potential reversal or strong trend
At Upper Band	Resistance	Watch for rejection or breakout
Middle Band	Neutral	Trend direction indicator
At Lower Band	Support	Watch for bounce or breakdown
Below Lower Band	Oversold	Potential reversal or strong trend

Usage Examples

Oversold Bounce (Mean Reversion):

{
  "type": "price_indicator",
  "price": "close",
  "indicator": "bollinger_lower",
  "period": 20,
  "stdDev": 2,
  "comparison": "below"
}
// Price below lower band = oversold, potential bounce

Upper Band Breakout:

{
  "type": "price_indicator",
  "price": "close",
  "indicator": "bollinger_upper",
  "period": 20,
  "stdDev": 2,
  "comparison": "crosses_above"
}
// Price breaks above upper band = strong momentum

Middle Band Crossover:

{
  "type": "price_indicator",
  "price": "close",
  "indicator": "bollinger_middle",
  "period": 20,
  "comparison": "crosses_above"
}
// Price crosses above middle band = bullish

Bollinger Band Strategies

1. Bollinger Bounce (Mean Reversion):

{
  "entryConditions": {
    "long": {
      "logicalOperator": "AND",
      "conditions": [
        {
          "type": "price_indicator",
          "price": "low",
          "indicator": "bollinger_lower",
          "period": 20,
          "stdDev": 2,
          "comparison": "below"
        },
        {
          "type": "price_indicator",
          "price": "close",
          "indicator": "bollinger_lower",
          "period": 20,
          "stdDev": 2,
          "comparison": "above"
        }
      ]
    }
  },
  "exitConditions": {
    "takeProfit": {
      "type": "indicator",
      "indicator": "bollinger_middle",
      "period": 20
    }
  }
}
// Enter when price touches lower band, exit at middle band

2. Bollinger Breakout:

{
  "entryConditions": {
    "long": {
      "logicalOperator": "AND",
      "conditions": [
        {
          "type": "price_indicator",
          "price": "close",
          "indicator": "bollinger_upper",
          "period": 20,
          "stdDev": 2,
          "comparison": "crosses_above"
        },
        {
          "type": "indicator_value",
          "indicator": "volume",
          "comparison": "above",
          "value": "sma_volume_20"
        }
      ]
    }
  }
}
// Enter on upper band breakout with volume confirmation

3. Bollinger Squeeze:

{
  "entryConditions": {
    "long": {
      "logicalOperator": "AND",
      "conditions": [
        {
          "type": "custom",
          "description": "Band width at 6-month low"
        },
        {
          "type": "price_indicator",
          "price": "close",
          "indicator": "bollinger_upper",
          "period": 20,
          "stdDev": 2,
          "comparison": "crosses_above"
        }
      ]
    }
  }
}
// Enter when bands squeeze then price breaks out

Bollinger Band Patterns

The Squeeze:

Bands contract to narrow range
Indicates low volatility
Precedes significant move
Trade the breakout direction

Walking the Bands:

Price stays near upper/lower band
Indicates strong trend
Don't fade the trend
Wait for reversal confirmation

Double Bottom/Top:

Price makes two touches of band
Second touch doesn't break band
Reversal signal
Enter on confirmation

Average True Range (ATR)

Calculation

ATR measures market volatility by calculating the average of true ranges over a specified period.

Formula:

True Range = max[(High - Low), |High - Close_prev|, |Low - Close_prev|]

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

First ATR = Simple average of first 14 TR values
Subsequent ATR = ((Previous ATR × 13) + Current TR) / 14

Example (14-period ATR):

Day 1: High=105, Low=100, Close_prev=102
TR = max[(105-100), |105-102|, |100-102|]
   = max[5, 3, 2] = 5

Day 2: High=108, Low=103, Close_prev=105
TR = max[(108-103), |108-105|, |103-105|]
   = max[5, 3, 2] = 5

Days 1-14: Calculate average
ATR = (5 + 5 + 4 + 6 + ... + 5) / 14 = 4.8

Day 15: TR = 6
ATR = ((4.8 × 13) + 6) / 14 = 4.89

Characteristics

Range: 0 to unlimited (in price units)
Period: 14 (standard)
Interpretation: Higher ATR = higher volatility
Use: Position sizing, stop loss placement
Not Directional: Doesn't indicate trend direction

ATR Interpretation

ATR Level	Volatility	Implications
Low ATR	Low volatility	Tight stops, smaller positions, breakout pending
Normal ATR	Average volatility	Standard position sizing
High ATR	High volatility	Wider stops, smaller positions, trending
Rising ATR	Increasing volatility	Trend strengthening or starting
Falling ATR	Decreasing volatility	Trend weakening or consolidating

Usage Examples

ATR-Based Stop Loss:

{
  "exitConditions": {
    "stopLoss": {
      "type": "atr",
      "atrPeriod": 14,
      "atrMultiplier": 2.0
    }
  }
}
// Stop loss = Entry ± (2 × ATR)

High Volatility Filter:

{
  "type": "indicator_value",
  "indicator": "atr",
  "period": 14,
  "comparison": "above",
  "value": "sma_atr_50"
}
// ATR above 50-period average = high volatility

Volatility Breakout:

{
  "type": "indicator_value",
  "indicator": "atr",
  "period": 14,
  "comparison": "crosses_above",
  "value": "sma_atr_20"
}
// ATR crosses above its average = volatility expansion

ATR Applications

1. Position Sizing:

Position Size = Risk Amount / (ATR × Multiplier)

Example:
Risk per trade = $1000
ATR = 2.50
Multiplier = 2.0

Position Size = $1000 / (2.50 × 2.0) = 200 shares

2. Stop Loss Placement:

Long Stop = Entry - (ATR × Multiplier)
Short Stop = Entry + (ATR × Multiplier)

Example (Long):
Entry = $100
ATR = $2.50
Multiplier = 2.0

Stop Loss = $100 - ($2.50 × 2.0) = $95

3. Profit Target:

Target = Entry + (ATR × Multiplier)

Example:
Entry = $100
ATR = $2.50
Multiplier = 3.0

Target = $100 + ($2.50 × 3.0) = $107.50

ATR Multiplier Guidelines

Multiplier	Use Case	Risk Level
1.0-1.5	Tight stops, scalping	High (more stops)
2.0	Standard stops	Medium
2.5-3.0	Swing trading	Low (fewer stops)
3.0+	Position trading	Very low

Keltner Channels

Calculation

Keltner Channels use ATR to set channel width around an EMA, combining trend and volatility.

Formula:

Middle Line = EMA(n)
Upper Channel = EMA(n) + (ATR(n) × Multiplier)
Lower Channel = EMA(n) - (ATR(n) × Multiplier)

Standard Settings:
- EMA Period = 20
- ATR Period = 10
- Multiplier = 2.0

Example (20 EMA, 10 ATR, 2.0 multiplier):

EMA(20) = 105.00
ATR(10) = 2.50

Upper Channel = 105.00 + (2.50 × 2.0) = 110.00
Middle Line = 105.00
Lower Channel = 105.00 - (2.50 × 2.0) = 100.00

Characteristics

Middle Line: EMA (typically 20)
Channel Width: ATR-based (adapts to volatility)
Multiplier: 2.0 (standard)
Best For: Trend following and breakouts
Advantage: Adapts to volatility changes

Interpretation

Price Position	Signal	Action
Above Upper Channel	Strong uptrend	Hold long, avoid shorts
Between Middle & Upper	Uptrend	Look for long entries
At Middle Line	Neutral	Trend direction indicator
Between Lower & Middle	Downtrend	Look for short entries
Below Lower Channel	Strong downtrend	Hold short, avoid longs

Usage Examples

Trend Following:

{
  "type": "price_indicator",
  "price": "close",
  "indicator": "keltner_middle",
  "period": 20,
  "atrPeriod": 10,
  "multiplier": 2.0,
  "comparison": "above"
}
// Price above middle line = uptrend

Breakout Entry:

{
  "type": "price_indicator",
  "price": "close",
  "indicator": "keltner_upper",
  "period": 20,
  "atrPeriod": 10,
  "multiplier": 2.0,
  "comparison": "crosses_above"
}
// Price breaks above upper channel = strong momentum

Channel Bounce:

{
  "logicalOperator": "AND",
  "conditions": [
    {
      "type": "price_indicator",
      "price": "low",
      "indicator": "keltner_lower",
      "period": 20,
      "atrPeriod": 10,
      "multiplier": 2.0,
      "comparison": "below"
    },
    {
      "type": "price_indicator",
      "price": "close",
      "indicator": "keltner_lower",
      "period": 20,
      "atrPeriod": 10,
      "multiplier": 2.0,
      "comparison": "above"
    }
  ]
}
// Price touches lower channel and bounces

Keltner Channel Strategies

1. Keltner Breakout:

{
  "entryConditions": {
    "long": {
      "logicalOperator": "AND",
      "conditions": [
        {
          "type": "price_indicator",
          "price": "close",
          "indicator": "keltner_upper",
          "period": 20,
          "atrPeriod": 10,
          "multiplier": 2.0,
          "comparison": "crosses_above"
        },
        {
          "type": "indicator_value",
          "indicator": "adx",
          "period": 14,
          "comparison": "above",
          "value": 25
        }
      ]
    }
  }
}
// Enter on upper channel breakout with strong trend

2. Keltner Trend Following:

{
  "entryConditions": {
    "long": {
      "conditions": [
        {
          "type": "price_indicator",
          "price": "close",
          "indicator": "keltner_middle",
          "period": 20,
          "atrPeriod": 10,
          "multiplier": 2.0,
          "comparison": "crosses_above"
        }
      ]
    }
  },
  "exitConditions": {
    "stopLoss": {
      "type": "indicator",
      "indicator": "keltner_lower",
      "period": 20,
      "atrPeriod": 10,
      "multiplier": 2.0
    }
  }
}
// Enter on middle line cross, stop at lower channel

Comparison: Bollinger Bands vs Keltner Channels

Feature	Bollinger Bands	Keltner Channels
Basis	SMA	EMA
Width Calculation	Standard Deviation	ATR
Responsiveness	Medium	High
Best For	Mean reversion	Trend following
Breakout Signals	Less frequent	More frequent
False Signals	Fewer	More
Volatility Adaptation	Good	Excellent

Combined Strategy

Bollinger + Keltner Squeeze:

When Bollinger Bands are inside Keltner Channels = low volatility
Breakout from this squeeze = high-probability trade
Trade in direction of breakout

{
  "entryConditions": {
    "long": {
      "logicalOperator": "AND",
      "conditions": [
        {
          "type": "custom",
          "description": "Bollinger Bands inside Keltner Channels"
        },
        {
          "type": "price_indicator",
          "price": "close",
          "indicator": "keltner_upper",
          "period": 20,
          "comparison": "crosses_above"
        }
      ]
    }
  }
}

Volatility Indicator Combinations

1. Bollinger Bands + ATR (Adaptive Stops)

Setup:

Bollinger Bands(20,2) for entries
ATR(14) for stop loss placement

Entry:

Price touches lower Bollinger Band

Stop Loss:

Entry - (2 × ATR)

{
  "entryConditions": {
    "long": {
      "conditions": [
        {
          "type": "price_indicator",
          "price": "close",
          "indicator": "bollinger_lower",
          "period": 20,
          "stdDev": 2,
          "comparison": "below"
        }
      ]
    }
  },
  "exitConditions": {
    "stopLoss": {
      "type": "atr",
      "atrPeriod": 14,
      "atrMultiplier": 2.0
    }
  }
}

2. Keltner Channels + Volume (Confirmed Breakouts)

Setup:

Keltner Channels(20,10,2) for breakout
Volume for confirmation

Entry:

Price breaks above upper Keltner
Volume > average volume

{
  "entryConditions": {
    "long": {
      "logicalOperator": "AND",
      "conditions": [
        {
          "type": "price_indicator",
          "price": "close",
          "indicator": "keltner_upper",
          "period": 20,
          "atrPeriod": 10,
          "multiplier": 2.0,
          "comparison": "crosses_above"
        },
        {
          "type": "indicator_value",
          "indicator": "volume",
          "comparison": "above",
          "value": "sma_volume_20"
        }
      ]
    }
  }
}

Best Practices

Do's

✅ Use Bollinger Bands for mean reversion in ranging markets
✅ Use Keltner Channels for trend following
✅ Use ATR for position sizing and stop placement
✅ Adjust band/channel parameters for different timeframes
✅ Combine with volume for breakout confirmation
✅ Use wider bands/channels in volatile markets

Don'ts

❌ Assume price will always bounce at bands (can walk the bands)
❌ Use fixed stop losses in volatile markets (use ATR)
❌ Ignore ATR when sizing positions
❌ Trade breakouts without volume confirmation
❌ Use same parameters for all instruments
❌ Fade strong trends just because price is at band

Common Pitfalls

1. Fading Strong Trends

Problem: Selling at upper band in strong uptrend Solution: Use trend filter (EMA or ADX) before mean reversion trades

2. Fixed Stop Losses in Volatile Markets

Problem: Stops too tight, get stopped out frequently Solution: Use ATR-based stops that adapt to volatility

3. Ignoring Volume on Breakouts

Problem: False breakouts without volume Solution: Require volume confirmation for breakout trades

Indicators Overview - All available indicators
Trend Indicators - MACD, ADX, Parabolic SAR
How to Use Bollinger Bands - Practical guide
Position Sizing Configuration - ATR-based sizing

Bollinger Bands​

Calculation​

Characteristics​

Band Width Interpretation​

Price Position Interpretation​

Usage Examples​

Bollinger Band Strategies​

Bollinger Band Patterns​

Average True Range (ATR)​

Calculation​

Characteristics​

ATR Interpretation​

Usage Examples​

ATR Applications​

ATR Multiplier Guidelines​

Keltner Channels​

Calculation​

Characteristics​

Interpretation​

Usage Examples​

Keltner Channel Strategies​

Comparison: Bollinger Bands vs Keltner Channels​

Combined Strategy​

Volatility Indicator Combinations​

1. Bollinger Bands + ATR (Adaptive Stops)​

2. Keltner Channels + Volume (Confirmed Breakouts)​

Best Practices​

Do's​

Don'ts​

Common Pitfalls​

1. Fading Strong Trends​

2. Fixed Stop Losses in Volatile Markets​

3. Ignoring Volume on Breakouts​

Related Documentation​

Bollinger Bands

Calculation

Characteristics

Band Width Interpretation

Price Position Interpretation

Usage Examples

Bollinger Band Strategies

Bollinger Band Patterns

Average True Range (ATR)

Calculation

Characteristics

ATR Interpretation

Usage Examples

ATR Applications

ATR Multiplier Guidelines

Keltner Channels

Calculation

Characteristics

Interpretation

Usage Examples

Keltner Channel Strategies

Comparison: Bollinger Bands vs Keltner Channels

Combined Strategy

Volatility Indicator Combinations

1. Bollinger Bands + ATR (Adaptive Stops)

2. Keltner Channels + Volume (Confirmed Breakouts)

Best Practices

Do's

Don'ts

Common Pitfalls

1. Fading Strong Trends

2. Fixed Stop Losses in Volatile Markets

3. Ignoring Volume on Breakouts

Related Documentation