Bollinger Bands, ATR and volatility

Volatility is the size of price changes over a period of time. It is neither good nor bad, but it directly affects stop distances, position size and how much risk a trade carries. Volatility indicators help you judge whether the market is currently calm or agitated.

Bollinger Bands

Bollinger Bands consist of three lines: a simple moving average in the middle (usually 20 periods) and two bands above and below it, placed two standard deviations away. When volatility rises the bands widen; when the market is quiet they contract.

Common patterns

• The squeeze: unusually narrow bands show volatility has dropped. Quiet periods tend to be followed sooner or later by a larger move, but the bands do not tell you its direction.
• Walking the band: in strong trends, price can hug the upper or lower band for some time. Touching a band is not, by itself, a reversal signal.
• Reversion to the mean: in ranging markets, price sometimes returns towards the middle line after reaching a band.

Average True Range (ATR)

ATR averages the "true range" of candles over a period, commonly 14. True range also accounts for gaps between candles. ATR is expressed in price units, such as dollars for an ounce of gold or pips for currency pairs, and it says nothing about direction.

Its main use is risk management. Some traders place stops a multiple of ATR (for example 1.5 or 2 times) away from entry, so the stop reflects the market's actual noise. When ATR is high, reducing position size helps keep the risk per trade roughly constant.

Volatility across markets

Crypto usually shows higher relative volatility than gold or the major currency pairs, and its volatility can vary a lot between hours and days. In forex and gold, major economic releases can make ATR jump within minutes. Settings that suit one market are not automatically right for another.

Key takeaways

• Bollinger Bands show the state of volatility, not the direction of the next move.
• A touch of the band is not a reversal signal on its own.
• ATR measures volatility and helps size stops and positions.
• Volatility levels differ widely between crypto, gold and forex.