How to find and trade volatility
Volatility is essentially the range of price movement inherent in a security and can be measured in several ways.
What is volatility?
Volatility is essentially the range of price movement inherent in a security and can be measured in several ways. Traders looking for ‘where the action is’ in markets would do well to identify which markets are showing an elevated degree of volatility.
Popular technical indicators used to identify the level of volatility in a security include Bollinger Bands and Average True Range (ATR).
How to identify rising volatility
Rising volatility is often associated with a strong directional price trends and breakouts as it accounts for a a wider range of price movement. In turn, rising volatility can be useful for swing traders, trend followers and breakout traders.
Rising volatility can be found using the aforementioned technical indicators in the following ways:
1) A widening of the distance between the upper and lower Bollinger Bands
2) A rise in the value of the Average True Range indicator.
It is important to note that volatility can increase on a rising or falling market, to assess the directional trend traders will still need to accompany price analysis with volatility analysis.
How to identify declining/low volatility
Declining or low volatility is often associated with a weaker directional move or rather sideways trend or consolidation. In turn low or declining volatility can highlight a non-trending price environment and range trading opportunity.
Declining or low volatility can be identified in the following ways:
1) A narrow or narrowing of the distance between the upper and lower Bollinger Bands
2)A fall in the value of the Average True Range indicator
The cyclicallity of volatility
Volatility is cyclical in nature, in that a period of low volatility is a precursor to high volatility, and high volatility is a precursor to low volatility. There is however no certainty relating to how long the a period of high or low volatility in markets may occur.
Volatility stemming from marco-economic risks
2019 has seen gold as a clear proxy for volatility in financial markets, reflecting the waxing and waning of macroeconomic tensions such as that of the US-China trade war and Brexit negotiations. Rising volatility is a friend of gold which generally benefits from increased safe haven demand on its occurrence, while the inverse is said to be true for the precious metal when a market calm prevails.
Other safe haven assets which generally see significant movements higher when volatility is on the rise include US Treasury Bills (bonds)
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