The Handbook of Technical Analysis + Test Bank_ The Practitioner\'s Comprehensive Guide to Technical Analysis ( PDFDrive )

Volatility Analysis

the relative average amount of price excursion over a selected duration. The du-

ration with the greater relative average excursion is considered the more volatile

trend, again, with respect to the fifth measure of volatility.

The fifth measure of volatility is determined by dividing the larger period’s

ATR by the smaller period’s ATR. For example, let us assume a currency trader

is interested in trading the hourly EURUSD. But to gauge the potential profit, the

trader would like to know the average daily excursion of the EURUSD. Assume

that the hourly ATR value for the EURUSD is 20 pips and that its daily ATR is

approximately 120 pips. To obtain the relative interval activity, we need to find

the average trend ratio. Dividing the daily by the hourly ATR values gives us, in

this case, an average trend ratio of 120/20 = 6.

Higher trend ratio values indicate a greater trend potential with respect to the

hourly time horizon. A relative trend ratio of 10 is considered more volatile, from

a trend‐based perspective, than one with a value of 5.

21.2 Some Statistical Measures of Price Volatility

There are four popular statistical measures of price volatility, namely:

1. Standard Deviation (SD)


2. Mean Deviation


3. Average True Range (ATR)


4. Stock Beta

Standard deviation measures the amount of spread or dispersion from the

mean or average value. If price or price returns indicate values that are close to the

mean, resulting in a narrower distribution or dispersion of values, we say there is

low standard deviation. This implies that there is low volatility in the price or the

price‐returns data. Higher standard deviation corresponds to a wider distribution

of values, hence more volatility.

figure 21.14 ATR Cycles of Volatility on the Hourly Natural Gas Chart.

Source: MetaTrader 4