Volatility and Trend

[rizwanuk]

Does Volatility of a particular market has any correlation with its trendiness?

Does increased volatility usually co exists or results in more trends or choppy markets?

Any insight, tips, thoughts or comments on the relationship between volatility and trend will be welcome.

 

[Rhody Trader]

The first step there is to define "volatility". What type are we talking about? Volatility or returns? Range volatility?

 

[rizwanuk]

Range Volaitlity or the standard deviation of the daily prices

 

[Rhody Trader]

You realize those are two completely different things, right?

The latter is what Bollinger Bands measure. I have found in my own experience (and I wrote an article for Stocks & Commodities on this in the mid-90s) that the Bands tend to widen as a trend is underway, which is what you would expect as the market persists in staying away from it's average. In application, however, I prefer to look for narrow Band Width to give me an indication that a market might be ready to start a new trend.

Range volatiliy is what the Average True Range (ATR) indicator measures. I don't use it much except as a broad reference of trading activity. You would expect the ATR to rise as a market trends higher and fall as it trends lower just on the basis of how an X% move varies with the actual level of the market in question.

 

[rizwanuk]

You realize those are two completely different things, right?

The latter is what Bollinger Bands measure. I have found in my own experience (and I wrote an article for Stocks & Commodities on this in the mid-90s) that the Bands tend to widen as a trend is underway, which is what you would expect as the market persists in staying away from it's average. In application, however, I prefer to look for narrow Band Width to give me an indication that a market might be ready to start a new trend.

Range volatiliy is what the Average True Range (ATR) indicator measures. I don't use it much except as a broad reference of trading activity. You would expect the ATR to rise as a market trends higher and fall as it trends lower just on the basis of how an X% move varies with the actual level of the market in question.

Thanks for your helpful comments.

Yes I do understand that these are two different things.

Can you explain a bit more on what do you mean when you say that ATR falls as market " trends lower just on the basis of how an X% move varies with the actual level of the market in question"

Why does ATR rises as market trends higher and falls when market trends lower?

Thanks for your help.

 

[Rhody Trader]

Thanks for your helpful comments.

Yes I do understand that these are two different things.

Can you explain a bit more on what do you mean when you say that ATR falls as market " trends lower just on the basis of how an X% move varies with the actual level of the market in question"

Why does ATR rises as market trends higher and falls when market trends lower?

Thanks for your help.

Pure math. If a stock with a price of 100 has a 5% range, that's 5 points. If a stock priced at 50 has a 5% range, that's 2 1/2h points. The ATR for the latter stock would be half the ATR of the first one.

ATR, as a base calculation, is not normalized to account for rising or falling prices, though you could take the raw reading and divide it by price to get ATR in percentage terms.

 

[rizwanuk]

Thanks!