Volatility Indicators

ATR (Average True Range)

Introduction: ATR estimates Volatility, which is how much a stock's price goes up or down over the Long-Term. High ATR implies the price moves a great deal, and low ATR implies it moves very little.

Terminologies:

  • Volatility: The level of variety in the price of a stock.
  • True Range: The distinction between the high and low prices of a stock over a given period.

Explanation: ATR assists traders with checking how much the price could move in a day. In the event that ATR is high, the stock is more unstable and can make large price swings.

Example: Assuming Stock DEF has an ATR of ₹10, it implies the stock will in general drop ₹10 up or as the day progressed.

How to Use:

  • Use ATR to set your stop-loss (the price at which you offer to stay away from a greater Loss). For unstable stocks, a greater stop-loss may be expected to try not to be halted out too early.

ATR Formula:

  • ATR: The Average True Range is calculated using the following formula:

    • ATR = (Previous ATR * (n-1) + TR) / n

  • Where:
    • TR (True Range): The greatest of the following three values:
      • Current High - Current Low
      • Absolute value of Current High - Previous Close
      • Absolute value of Current Low - Previous Close
    • n: The number of periods (typically 14 periods for ATR calculation).
    • Previous ATR: The ATR value from the previous period.
ATR (Average True Range)

Bollinger Bands

Introduction: Bollinger Bands assist traders with understanding a stock's Volatility and potential overbought or oversold conditions. They comprise of a centre band (a simple moving average) and two Outer Bands (standard deviations from the centre).

Terminologies:

  • Moving Average: The average of a stock's price over a specific period.
  • Standard Deviation: A statistical measure of the spread of a stock's prices over the long run.

Explanation: When the price is close to the upper band, the stock might be overbought, and when close to the lower band, it could be oversold.

Example: Assuming that Stock GHI is contacting the upper Bollinger Band, it could mean the stock is overpriced and might soon correct.

How to Use:

  • Buy when the price is close to the lower band (oversold).
  • Sell when the price is close to the upper band (overbought).

Bollinger Bands Formula:

  • Middle Band: The middle band is simply the moving average (typically 20 periods) of the stock's price.

    • Middle Band = 20-period Simple Moving Average (SMA)

  • Upper Band: The upper band is the middle band plus two times the standard deviation of the stock price over the same period.

    • Upper Band = Middle Band + (2 * Standard Deviation)

  • Lower Band: The lower band is the middle band minus two times the standard deviation of the stock price over the same period.

    • Lower Band = Middle Band - (2 * Standard Deviation)

Bollinger Bands

Bollinger Bandwidth

Introduction: Bollinger Bandwidth estimates the width of the Bollinger Bands, giving insights into market Volatility. It demonstrates the connection between the upper and lower bands and can assist traders with recognising tperiods of high or low volatility.

Terminologies:

  • Bollinger Bands:An volatility indicator comprising of a centre band (a simple moving average) and two Outer Bands (standard deviations from the centre)
  • Volatility: A statistical measure of the scattering of profits for a given security or market record.

Explanation: Bollinger Bandwidth is determined as the contrast between the upper and lower Bollinger Bands partitioned by the centre band. A higher data transmission demonstrates expanded Volatility, while a lower transfer speed proposes lower Volatility.

Example: Assuming Stock XYZ's Bollinger Bandwidth is rising, it demonstrates expanding Volatility, which might flag potential trading opportunity.

How to Use:

  • Search for periods when the Bollinger Bandwidth is extending, demonstrating expanded Volatility and potential price movement.
  • Consider entering trades when the bandwidth is high and afterward contracting, which might propose a possible reversal or breakout.

Bollinger Bandwidth Formula:

  • Bollinger Bandwidth: The Bollinger Bandwidth is calculated using the following formula:

    • Bollinger Bandwidth = (Upper Band - Lower Band) / Moving Average

  • Where:
    • Upper Band: The upper Bollinger Band, which is typically calculated as the 20-period moving average plus two times the standard deviation.
    • Lower Band: The lower Bollinger Band, calculated as the 20-period moving average minus two times the standard deviation.
    • Moving Average: The 20-period simple moving average of the price.
Bollinger Bandwidth




Dual Bollinger Bands

Introduction: Double Bollinger Bands comprise of two arrangements of Bollinger Bands plotted on a similar graph, giving extra knowledge into Volatility and potential price reversal. The Inner Bands address more tight price movement, while the Outer Bands show more extensive price movement.

Terminologies:

  • Inner Bands: The Bollinger Bands with a more limited Moving Average and a more modest standard deviation, showing more tight price activity.
  • Outer Bands: The Bollinger Bands with a more Long-term Moving Average and a bigger standard deviation, demonstrating more extensive price activity.

Explanation: The internal and Outer Bands assist brokers with distinguishing potential breakout focuses and survey market Volatility. At the point when the price contacts the outer bands, it demonstrates conceivable overbought or oversold conditions, while the inner bands give bits of knowledge into Short-term price activity.

Example: On the off chance that Stock XYZ's price breaks over the external band while likewise being close to the internal band, it recommends a possible bullish breakout.

How to Use:

  • Buy when the price breaks over the external band.
  • Sell when the price breaks underneath the external band.
  • Screen the cooperation between the inward and Outer Bands for expected reversal.

Bollinger Bands Formula:

  • Upper Bollinger Band: Upper Band = Moving Average + (2 * Standard Deviation)
  • Lower Bollinger Band: Lower Band = Moving Average - (2 * Standard Deviation)
  • Inner Upper Band: Inner Upper Band = Moving Average + (1 * Standard Deviation)
  • Inner Lower Band: Inner Lower Band = Moving Average - (1 * Standard Deviation)
Dual Bollinger Bands

Keltner Channels

Introduction: Keltner Channels are volatility-based envelopes set above and below a moving average. The channels widen or narrow based on volatility, helping traders identify potential breakouts or reversals.

Terminologies:

  • Envelope: A technical indicator that creates limits above and under a price, addressing overbought or oversold conditions.

Explanation: Keltner Channels comprise of three lines: a centre line (exponential moving average), an upper channel (EMA + ATR), and a lower channel (EMA - ATR). At the point when the price contacts the upper or lower channel, it demonstrates potential overbought or oversold conditions.

Example: Stock XYZ's price rtouches the upper Keltner Channel, flagging potential overbought conditions. This could recommend that the stock is expected for a pullback.

How to Use:

  • Buy when the price contacts the lower channel and begins to rise, showing an expected bounce back from oversold conditions.
  • Sell when the price contacts the upper channel and begins to fall, showing potential overbought conditions.

Keltner Channels Formula:

  • Upper Channel:
    Upper Channel = EMA(Typical Price) + (Multiplier * ATR)
  • Middle Channel:
    Middle Channel = EMA(Typical Price)
  • Lower Channel:
    Lower Channel = EMA(Typical Price) - (Multiplier * ATR)
  • Where:
    • Typical Price: The average of the high, low, and close prices for the period:
      Typical Price = (High + Low + Close) / 3
    • EMA (Exponential Moving Average): A type of moving average that gives more weight to recent prices.
    • ATR (Average True Range): A measure of market volatility, typically over a 14-period range.
    • Multiplier: The multiplier used is typically set to 2 (it may vary based on user preference).
Keltner Channels

Donchian Channels

Introduction: Donchian Channels are a sort of trading band indicator that assists brokers distinguish breakout points by contrasting the current price and the highest high and least low over a particular time frame.

Terminologies:

  • Breakout: When the price moves above or under a characterised level, flagging the beginning of a new trend.
  • Trading Band: A range inside which a stock's price changes, made by upper and lower limits.

Explanation: Donchian Channels are made by plotting the highest high and least low over a set number of periods, normally 20. The upper limit shows the highest high, and the lower limit shows the least low. On the off chance that the price breaks above or underneath these limits, it might show a trend reversal or continuation.

Example: In the event that Stock XYZ's price breaks over the upper Donchian Channel, it proposes a potential new uptrend.

How to Use:

  • Buy when the price breaks over the upper limit, showing an expected breakout.
  • Sell when the price falls underneath the lower limit, showing an expected breakdown.

Donchian Channels Formula:

  • Upper Band (UB): The highest high over the specified period (e.g., 20 periods).

    • UB = Highest High over N periods

  • Lower Band (LB): The lowest low over the specified period (e.g., 20 periods).

    • LB = Lowest Low over N periods

  • Middle Band (MB): The average of the upper and lower bands.

    • MB = (UB + LB) / 2

Donchian Channels

Mass Index

Introduction: The Mass Index is an Volatility indicator that recognises potential trend reversal by dissecting price movements and Volatility. It's especially valuable in identifying market reversal.

Terminologies:

  • Volatility: The level of variety in an trading price series after some time.
  • Trend Reversal: A shift in the course of price movement.

Explanation: The Mass Index is determined utilising the scope of prices over a set period. A worth over 27 is viewed as a sign that a potential reversal could happen, while a worth under 26 recommends stability.

Example: In the event that Stock XYZ's Mass Index arrives at 30, it shows expected Volatility and a trend reversal.

How to Use:

  • Buy when the Mass Index dips under 26 after being over 27, demonstrating a potential trend reversal to the potential gain.
  • Sell when the Mass Index rises over 27 after being under 26, showing potential trend reversal to the drawback.

Mass Index Formula:

  • MI: The Mass Index is calculated using the following formula:

    • MI = Sum of (High - Low) / Sum of (High - Low) for the last 25 periods

  • Where:
    • High: The highest price in the period.
    • Low: The lowest price in the period.
    • 25 periods: The Mass Index typically uses 25 periods (days) for its calculation, although it can be adjusted.
Mass Index

Market Facilitation Index (MFI)

Introduction: The Market Facilitation Index (MFI) is an Volatility indicator that actions the efficiency of price movement in light of volume. It assists traders with recognising the strength of price movements.

Terminologies:

  • Efficiency: The connection between price movement and trading volume.
  • Volume: The quantity of shares traded on a given period.

Explanation: The MFI is determined by dividing the price change by volume. A higher MFI shows that a price move is upheld by huge volume, while a lower MFI proposes more fragile price movement.

Example: Assuming Stock XYZ's MFI is high, it shows that a price increment is upheld by solid volume, proposing a strong trend.

How to Use:

  • Buy when MFI increments with rising prices, shows strong momentum.
  • Sell when MFI diminishes with rising prices, shows weak momentum.

MFI Formula:

  • MFI: The Market Facilitation Index is calculated using the following formula:

    • MFI = (Close - Open) / Volume

  • Where:
    • Close: The closing price of the stock for the period.
    • Open: The opening price of the stock for the period.
    • Volume: The volume of trades for the period.
Market Facilitation Index (MFI)

TRIN (Arms Index)

Introduction: The TRIN (Arms Index) is a market breadth indicator that looks at the quantity of progressing and declining stocks with their particular volumes. It assists traders with surveying market sentiment

Terminologies:

  • Advancing Issues: Stocks that closes higher than the earlier day
  • Declining Issues: Stocks that closes lower than the earlier day.

Explanation: TRIN is determined as the proportion of the Advancing Issues to declining issues separated by the proportion of their particular volumes. A value over 1 demonstrates negative sentiment, while a worth under 1 shows bullish sentiment.

Example: Assuming the TRIN is under 1, it recommends that there is solid buying opportunity.

How to Use:

  • Buy when the TRIN is under 1, showing bullish sentiment.
  • Sell when the TRIN is over 1, showing negative sentiment.

TRIN Formula:

  • TRIN: The TRIN (Arms Index) is calculated using the following formula:

    • TRIN = (Advancing Issues / Declining Issues) / (Advancing Volume / Declining Volume)

  • Where:
    • Advancing Issues: The number of stocks that are increasing in price during the given time period.
    • Declining Issues: The number of stocks that are decreasing in price during the given time period.
    • Advancing Volume: The total trading volume of the advancing stocks.
    • Declining Volume: The total trading volume of the declining stocks.


Percent B (Bollinger Percent B)

Introduction: Percent B is an momentum indicator that actions the price’s position comparative with the Bollinger Bands. It assists traders with surveying whether the price is close to the upper or lower bands, demonstrating potential overbought conditions.

Terminologies:

  • Bollinger Bands: An Volatility indicator comprising of a centre band (simple moving average) and two Outer Bands (standard deviations from the centre band).
  • Overbought: When the price is close to the upper Bollinger Band, recommending a potential price decline.
  • Oversold: When the price is close to the lower Bollinger Band, recommending a potential price increment.

Explanation: Percent B is calculated as follows: 

Percent B = (Current Price - Lower Bollinger Band) / (Upper Bollinger Band - Lower Bollinger Band)
A value above 1 indicates that the price is above the upper band (overbought), while a value below 0 indicates that the price is below the lower band (oversold).

Example: If Percent B is 1.2, the price is above the upper Bollinger Band, suggesting an overbought condition.

How to Use:

  • Buy when Percent B is below 0, indicating potential oversold conditions.
  • Sell when Percent B is above 1, indicating potential overbought conditions.

Percent B Formula:

  • Percent B (B%): The formula for Percent B is as follows:

    • Percent B (B%) = (Price - Lower Bollinger Band) / (Upper Bollinger Band - Lower Bollinger Band)

  • Where:
    • Price: The current price of the stock (usually the closing price).
    • Upper Bollinger Band: The upper band, calculated as the moving average plus 2 standard deviations.
    • Lower Bollinger Band: The lower band, calculated as the moving average minus 2 standard deviations.
Percent B (Bollinger Percent B)