Volatility indicators reveal the size and magnitude of price fluctuations, providing insight into the level of market activity. Markets fluctuate between periods of high volatility and low volatility, with a period of low volatility gradually increasing in intensity, and a period of high volatility gradually diminishing in intensity to become low volatility.
For instance, one of the most popular of volatility indicators, the Bollinger Band, measures volatility via the bands (2 standard deviations of the 20 SMA): the bands expand when volatility is rising, and contract when it is falling. Over the years traders have figured out different ways of trading off the indicator. Some choose to trade the breakout: buying (selling) the breakout (breakdown) of pricing crossing over (under) the upperband (lowerband). Others choose to trade the reversal bounce: buying (selling) the bounce of prices crossing under (over) the upperband (lowerband).
|Bollinger Bands||The most popular volatility indicator|