Volatility Indicators

Direct Answer

A volatility measure describes how far price typically travels over a period, without predicting which way. Its practical use is mechanical: volatility sets how wide a stop must be to survive ordinary noise, and therefore how large a position can be for a fixed amount of risk. Deriving the stop from a volatility measure and the size from that stop keeps the money at risk constant while the market changes, which a fixed stop distance cannot do.

Why size positions from volatility?

Because a fixed stop distance means a different amount of risk in every instrument and every regime. Deriving the stop from a volatility measure, then the size from that stop, keeps the money at risk constant while the market changes, which is the point of position sizing.

Every guide in this section

9 guides in this section.

All guides

• ATR Stops Explained

  ATR stops set exit levels a multiple of Average True Range away from price, adapting stop distance to real volatility.

• Gap Risk vs Continuous Volatility

  Gap risk is price discontinuity between a close and the next open; continuous volatility is the gradual price diffusion that occurs while a market trades.

• Historical Volatility Explained

  Historical volatility measures how much an asset's price has actually fluctuated over a past period, expressed as an annualized standard deviation of returns.

• Keltner Channels Explained

  Keltner Channels are a volatility envelope built from an EMA and ATR bands.

• Realized Volatility Explained

  Realized volatility measures how much an asset's price actually moved over a past period, calculated from historical returns.

• Standard Deviation Explained

  Standard deviation measures how much price returns vary from their average, making it the core building block of volatility indicators like Bollinger Bands.

• Volatility-Adjusted Position Sizing

  Volatility-adjusted position sizing scales share count to ATR so every trade risks a comparable dollar amount.

• Volatility Breakouts Explained

  A volatility breakout is when price exits a period of tight consolidation with a sharp directional move.

• Volatility Clustering Explained

  Volatility clustering is the tendency for large price moves to be followed by large moves and calm periods to be followed by calm periods.