ThE hAnDbook of TEChnICAl AnAlysIsAs a consequence, volatility arising from price fluctuation cannot be prop-
erly accounted for using the first two measures of volatility, namely, the change
in the rate of change in price and maximum amount of price change over equal
intervals.
As such, we have to resort to the third measure of volatility, that is, the capture
of price fluctuations via the sum of all price movement over the specified duration.
This is done by calculating the sum of all price changes. Note that we only take
the sum of the absolute values of all price changes. See Figure 21.11.
Note that the sum of all absolute price changes is always greater than the
maximum price difference over the same duration, that is:
| ( 1 −+−+−++−>− 2 ) | | ( 2 3 ) | | ( 3 4 ) |... | (P 13 P 14 ) | | ( PP 1 PP 14 )) | P P P P
The only issue with using the third measure is that of determining which peak
and trough represent the best inflection points to use in the calculation. Of course,
there are waves and subwaves, and even smaller waves of subwaves. The practi-
tioner must therefore select an appropriate price filter to reflect the degree of wave
action observed. Many professionals use a zigzag overlay indicator to help in
filtering and identifying the wave degree desired. Figure 21.12 is an hourly chart
of Natural Gas with the zigzag indicator filtering out extraneous price activity,
providing the desired inflection points.
Once the sum of all absolute price changes is calculated, this value is then
compared with other third‐measure values over similar durations in order to de-
termine the more volatile price behavior. The larger of the two values indicates
the more volatile price action, regardless if the trend was up or down. Without
comparing volatility measurements over similar durations, there is no way of de-
termining the more volatile action. It is essentially a comparative study.
figure 21.11 The Sum of All Price Changes as a Measure of Potential Volatility.