ThE hAnDbook of TEChnICAl AnAlysIsexample, if we applied the third measure of volatility to our current example,
the consolidation on the left‐hand side of Figure 21.19 will be considered more
volatile. The sum of all absolute price differences is greater than the consolidation
on the right‐hand side of the illustration.
Standard deviation is also used to measure the dispersion behavior of prices
from a simple moving average of prices. In our earlier example, we used it to
forecast the overreaction in trend rates, but it may also be used to examine the
overreactions in price fluctuations. One such overlay indicator that does this won-
derfully is the Bollinger Bands, created by John Bollinger. Bollinger bands use a
2‐sigma band around a simple moving average of closing prices. (Sigma is used
interchangeably with SD.) Prices testing the upper and lower band of the 2‐sigma
range represent, in the first instance, a strongly trending behavior. It also indicates
a possibility of overreaction, with the potential for a reversal. Hence, Bollinger
bands are an effective way of portraying volatility in prices. By detrending the val-
ues between the upper and lower Bollinger bands, we derive a bandwidth oscilla-
tor that clearly depicts periods of low and high volatility in price. See Figures 21.20
and 21.21.
average True range (aTr)
The average true range, ATR, measures the amount of interval volatility in
prices. It tracks the average true range of a specified number of bars. It was
introduced by Welles Wilder in his groundbreaking book, New Concepts in
T echnical Trading Systems. True range is the largest value of any of the three
following possibilities:
- Difference in price between the high and low of the current bar
figure 21.19 Non‐Volatility in Ranges with Constant Rate of Change.