Volatility means trading opportunities. One of the famous indicator is Actual True Range, which is easy to construct and understand, for example, # 0777, consolidated for a while and up break the box to make a good advance:
The above chart showing two ATR. The ATRN is a normalized ATR with the SMA of the closing price. Because ATR is an absolution term, it means that you can’t compare one with another. For example, HSI ATR is usually a few hundred points; ATR of # 0777 is $0.5 to $1. ATRN can be used for comparison and for other trading algorithm’s building block.
Here is another example of box up break, where ATR shoot up shapely:
Among the various chart pattern, box breakout is one of the most powerful. ATR can be used as a building block to construct such indicators.
A collapsing example:
The ex-dividend effects on ATR indicator is none, if aastock’s old method is used. However, if you construct a normalized ATR, the effect is large in special cases, like 2088 this year:
Here is the old method:
The new method before and after the big dividend payout: Note that the normalized ATRN is not affected in the new method.
There are quite a few trading system based on volatility. Definitely ATR is a useful building block for those systems.
Volatility mean opportunities and risks at the same time. Another use of ATR is to control the bet sizes for future / options trading. Some recommend to use ATR for setting cut loss price points in options trades. It is also useful to measure the overall volatility of a portfolio. Will talk about it in portfolio management later.