Volatility Indicator

Definition

This indicator plots a smoothed average of the “True Range”. This range measures the normal range of a bar, but first checks the previous bar’s closing price to check if it is outside the current bar’s range; if it is outside, the closing price is used instead of the high or low. In this way, the previous close is considered in the current range in order to solve for gaps between bars.

Formula

Volatility is basically the standard deviation on the market price studied over a certain
period of time. The formula for standard deviation is:

Volatility is basically the standard deviation on the market price studied over a certain
period of time. The formula for standard deviation is:

Use

As its name implies, the volatility indicator is used for measuring the market’s volatility based on the price ranges. This indicator helps the analyst to see extreme changes in volatility related to changes in the character and speculation of a given market.

Possible Application

This indicator can help the trader be aware of how volatile a specific market of trading securities is and determine if it fits its trading personality and strategy. Furthermore, the volatility indicator is also useful to monitor sudden changes in volatility and to be aware of this fact can be crucial for a successful trading system.

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