Volatility Analysis
figure 21.18 First Measure of Volatility in Reversing Markets at a Constant Rate of
Change in Price.A trend may be up over the last five hours but still very much down if compared
to prices over the last five days. Similarly, the market may be volatile with respect
to the third measure of volatility, but regarded as non‐volatile if gauged by other
measures of volatility. These questions need a basis of reference in order to repre-
sent meaningful queries. Getting back to Figure 21.18, let us examine if such price
action is considered volatile or otherwise.
Since the mean rate of change in price is still $2 per hour, the mean and stan-
dard deviation values are zero. This is because the difference between each rate of
change and the mean is zero, that is,■ (^) For mean deviations: |$2−Mean| = |$2−$2| = $0
■ (^) For standard deviations: ($2−Mean)^2 = ($2−$2)^2 = $0
Hence, the sum of all differences for both deviations would yield zero. This
means that as far as the first measure of volatility is concerned, ranging action of
this sort is considered to be non‐volatile. Therefore, comparing durations with
ranging action that comprises constant rates of change in prices for the purposes
of ascertaining the more volatile behavior is not possible via the first measure
of volatility. It does not even matter if the lengths of the durations are equal or
whether the rate of changing prices is occurring at the same rate. As long as the
rates of change in prices are constant, there is no volatility in ranging action and it
is practically indistinguishable via the first measure of volatility. See Figure 21.19.
The second measure of volatility will also be unable to distinguish between
ranges of equal maximum price ranges. For consolidations of equal sizes, we
need to apply either the third or fourth measures of volatility in order to find out
which duration of price action is more volatile when compared to the other. For