Volatility Analysis
figure 21.12 The Sum of All Price Changes as a Measure of Potential Volatility.
Source: MetaTrader 4(4) The fourth Measure of Volatility: The degree of
interval activity over equal durations
The fourth measure of volatility is characterized by the average interval activity
over the duration observed. It measures that average of all true range (ATR) ac-
tion for each interval over the duration. Therefore, when comparing two similar
durations, the duration that gives the larger average true range value is considered
more volatile, with respect to the fourth measure of volatility. See Figure 21.13.
From the idealized illustration in Figure 21.13, we observe three sets of
Japanese candlestick action over the same duration, that is, 18 periods, each with
a fixed candlestick range for the sake of convenience. Let us assume that the aver-
age true range, ATR, over 18 periods yields $1.50 over the first duration of candle-
sticks, $1.00 over the second duration, and $4.00 over the third duration. Though
this is merely an illustration, notice that the fixed candlestick range for the second
duration of candlesticks is $0.70, which is less than its ATR value of $1.00. This is
because we assume that gapping action has contributed to the increase in the true
range values of a number of candlesticks. ATR values and the fixed candlestick
ranges are identical for the remaining two durations of candlestick action, as no
gapping action is assumed. Notice that both the candlestick action over the first
and second durations has a maximum price range of $9, whereas the third dura-
tion of candlestick action has a maximum price range of only $6. Therefore, by
way of the second measure of volatility, the last duration has the lowest volatility
of the three durations. Conversely, if we measure volatility via the fourth mea-
sure, that is, ATR size, the last duration of candlestick action now has the highest