ThE hAnDbook of TEChnICAl AnAlysIsvolatility of the three durations. Therefore, depending on what type of volatility is
being observed or analyzed, the measure of volatility may vary.
Figure 21.14 shows the ATR cycles of (fourth measure) volatility on the hourly
Natural Gas chart. Notice the peaks in the ATR indicating a higher‐than‐normal aver-
age candlestick size over the last seven periods of lookback in the ATR oscillator. The
troughs in the ATR indicate areas of smaller‐than‐normal average candlestick size. It
is very important to realize that high ATR readings do not necessarily correspond to
trending action in price. It merely indicates a larger average candlestick size over the
selected lookback period on the ATR indicator. Points 1, 2, 3, and 4 correspond to
areas of high (fourth measure) volatility consolidations, whereas Points X, Y, and Z
correspond to areas of high (fourth measure) volatility trend action. Points A to H in-
dicate areas of low volatility, which is usually accompanied by very little trend activity.
The bidirectional trader may also take advantage of such cyclical action by
anticipating potential areas of low volatility consolidation for the placement of
breakout straddles. The trader may also use the average ATR values during peri-
ods of high volatility consolidations as a basis for determining the most appropri-
ate stopsize for a trend-following setup.
(5) The fifth Measure of Volatility: The degree
of relative interval activity over equal durations
The fifth measure of volatility identifies trend‐related volatility. The first measure
of volatility gauges the change in the rate of change in price as a guide to the
degree of volatility in a trend. The fifth measure, on the other hand, only compares
figure 21.13 ATR Size: The Fourth Measure of Volatility.