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Benjamin Schmitz

What are the best technical indicators for volatile stocks?

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Volatility is especially important for day traders; it’s hard to make money without frequent price fluctuations. But volatility is a two-edged sword—trades can go against you quickly. For that reason, it’s important to have an arsenal of technical indicators to help you tame the volatility beast. Volatility indicators are unique in that they measure how far a security has moved away from mean directional value. A high volatility stock makes big moves from its average direction, while a low volatility stock stays close to the moving average. Volatility indicators can be lumped into two main categories: Oscillators and channels. Oscillators move between two extreme values, typically 0 and 100, and build out a trend using the results. As long as the security trades within the established range, the oscillator’s signals are generally reliable, but false signals are a common pitfall when oscillators are used during a breakout. Channels are overlays on the main trading chart that use volatility to predict the range in which the price should remain for a period of time. The theory behind channels is that when a price has moved too far from the average, traders react with moves in the opposite direction to bring the price back within range. Of the oscillators, ATR is perhaps the most accurate volatility indicator. It is a pure volatility indicator and not a reflection of price. Although it doesn’t always point to a trend, it does reflect the nature of the market as a whole. It is a lagging indicator and may rise and fall in either an uptrend or a downtrend. Generally, ATR rises as the market consolidates into a definable trend, but you may actually see it fall when prices form into a trend. Of the channel variety, two of the more popular are Bollinger Bands and Keltner Channels. Bollinger Bands create an envelope using the SMA and drawing +/- lines at two standard deviations. Keltner Channels use the EMA and ATR as the basis for the channel width. Traders using Bollinger Bands watch for the squeeze, a period of low volatility in which the channel narrows, constricting the SMA. This usually presages a period of high volatility in which to enter trades. When the bands are wide, a period of low volatility is usually forthcoming, signaling an exit. Keltner Channels are generally smoother and narrower because ATR is less volatile than the SMA. As a trend following indicator, they are used to predict breakouts. A surge above the upper channel implies extreme strength, while a drop below it implies extraordinary weakness. Volatility indicators form the basis of many profitable trading strategies, but you should never rely on volatility alone to make trade decisions.

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Hello Benjamin,

The three technical indicators I’d suggest to determine the volatility of a market are the CBOE Volatility Index (VIX), the average true range (ATR), and Bollinger Bands.

CBOE Volatility Index is one of the most commonly followed indicators of market volatility. This indicator is calculated through an option-pricing model which displays the current or anticipated market volatility. You will recognize this indicator by its ticker symbol, VIX. 

The Average True Range (ATR) computes what’s called the “true” range, establishing it as a 14-day exponential moving average of that range. Large ATR reflects higher volatility, and on the other hand, a smaller ATR indicates decreased volatility. 

Ultimately, Bollinger Bands are a technical indicator composed of two bands, reflecting the two standard deviations above and under the 20-day MA. Wider Bollinger Bands indicate higher volatility while narrow bands indicate lower market volatility. 

The last two indicators can be used in any stock.

Hope you’ve got your answer.

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Hi, thanks for posting the question.

The most common volatility indicators are oscillators and channels. 

Oscillators compute a value that’s reflected in an individual chart below the price chart. The relation between the present value and previous values enable traders to anticipate the future behavior of the market. 

One of the most reliable oscillators is the Average True Range (ATR), which tends to determine did an average period of an asset behaved in the past, utilizing a very accurate method.

Channels, on the other hand, indicate volatility by computing a price channel displaying it in the main chart. It surrounds the present market price and anticipates the range in which the market will most likely stay. 

A good example of a channel as a volatility indicator are the Bollinger Bands, which draw a price channel around the existing market price. Here the market volatility is based on the standard deviation which changes in relation to volatility changes.
 

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Great question, Benjamin. Let me add something to what the others have advised.
While it’s impossible for day traders to make profits without market swings, unstable prices can lead to the loss of your capital. That’s why you need volatility indicators to track a security’s movement from its average directional value. While high volatility stocks stray from the mean direction, low volatility stocks remain near the average. 
These indicators fall into two categories, namely, oscillators and channels. First off, oscillators compute a value and illustrate it on a different chart. The relationship between past and existing values is essential for the prediction of future trends. Conversely, channels are overlaid on the central trading diagram that relies on volatility to project price ranges. Though these indicators support numerous trading strategies, volatility alone shouldn’t be used to make investment decisions.
 

 

 

 

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Hi Benjamin, thanks for coming here.

Others have already addressed this question, but I see that an important technical indicator hasn’t been discussed yet. 

When it comes to volatile stocks, Bollinger Bands is a popular tool. It is a statistical chart indicator used in different markets, such as stocks, forex, futures, and crypto. In general, Bollinger Bands is looking to identify overbought and oversold levels, following trends, and spotting breakouts.

As such, the indicator works to determine highs and lows, with the upper band pointing towards higher levels in statistical terms. On the other hand, the lower band indicates cheaper/lower levels, while the Bollinger bandwidth refers to the market volatility.

Bollinger Bands work in such a way that the bands widen in markets that are more volatile and narrow down in less volatile markets. For this reason, it’s a good indicator to use when trading more volatile stocks. 

The Bollinger Bands are set of three lines. The middle band consists of the 20-day SMA. In order to calculate the higher band, you need to add a doubled standard deviation to the middle band. To calculate the lower band, you should subtract the doubled daily standard deviation from the middle band. 

Again, Bollinger Bands is used to recognize overbought and oversold market conditions. This is calculated by monitoring whether the price of an asset in question is below the lower Bollinger band. In that case, the market is oversold. Conversely, if the price breaks above the higher band, the market works in an overbought environment and the reversal is likely to take place soon.

I hope this answer helped you. 


 

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Hello Benjamin,

The top 3 market indicators used to gauge volatility are the CBOE Volatility Index (VIX), the Average True range (ATR), and Bollinger Bands.

VIX is an indicator that tracks volatility that’s priced in a strip of S&P 500 Index options.


ATR refers to a chart indicator that showcases the daily trading range of a stock or a commodity, where high readings indicate high volatility.

Bollinger Bands is another technical analysis tool that can track volatility, particularly helpful in times of quiet and explosive trading. 
 

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