What are the best indicators to trade volatile stocks?
No best indicator for stock market only by DIP knowledge and Good experience can trade in volatile Market our Free telegram @Equityadvance
Thanks, Suruchi!
I have been trading in markets for a very long time and I have observed that volatility plays an important role. To play volatility it’s important to know 2-3 indicators, with the help of which one can earn money in volatile stocks.
1.Average True Range (ATR) . Average True Range measures the true range for a particular period, typically 14days. This indicator is purely a volatility measure and does not indicate trend. When markets enter into a strong trend following a period of consolidation, ATR rises; and it falls as the market transition shifts from choppy markets into a smooth and smaller trend.
- Bollinger Bands. Bollinger Bands are calculated based on the distance of price from the moving average, for a specified period of time, which is typically 20 days. The bands are two standard deviations above and below the moving average. Bollinger bands indicate both direction and volatility. When price volatility is high, the bands widen; and when it is low, the bands tighten.
Besides these two, there is one more indicator that can be used to trade volatility. It is known as the volatility index. Volatility Index is an index that is used to measure the near term volatility expectations of the markets. I don’t use the Volatility index indicator much, but if it suits you, then you can use it to trade volatile stocks.
Agreed with what Suruchi is saying. Bollinger Bands and Average True Range (ATR) are two excellent indicators to gauge the volatility of an underlying instrument.
Bollinger Bands measure standard deviation around a central moving average. The default reading for standard deviation is ±2, while that for the central moving average is 20-period.
Meanwhile, ATR measures volatility based on the Trading Range (TR) of each bar/candle. The default reading for ATR is 14-periods.
While Bollinger Bands are plotted on the price itself, ATR is typically plotted in a separate panel.
As Suruchi said, Bollinger bands measure both volatility and direction. Bollinger bands rise when price is rising, and vice versa. Meanwhile, volatility is measured by the distance between bands. Periods when volatility is high are accompanied by bands that are far apart from each other and the central moving average; while periods when volatility is low are accompanied by bands that are closer to each other and the central moving average.
On the other hand, ATR is trend neutral and focuses exclusively on Volatility. A low, stagnating ATR reading means low volatility; whereas, a low, but rising ATR reading means volatility is low but is starting to pick up. At the other extreme, a high, rising ATR reading means volatility is high and is continuing to rise; whereas, a high, but falling ATR reading means volatility is high but is decelerating.
To read more about Bollinger Band on FYERS School of Stocks platform, click here
To read more about ATR on FYERS School of Stocks platform, click here