Trading markets cannot exist without volatility. The word ‘volatile’ has garnered a negative reputation when it could help traders and investors in many ways. The risk of making a loss in a volatile market, like the crypto market, is high, but it is the same volatility that allows traders to maximize their profits. Without it, the profit margin will be negligible. There are various ways to keep a check on the volatility of a security or instrument and get positive results. You can take the help of tools, charts, and indicators for the same. This article will discuss different volatility indicators that can help you in becoming a better trader.

What are Volatility Indicators?

Volatility indicators represent trading statistical indicators that describe the degree of variation of a trading price series over some period of time. In simple words, volatility presents how much the price of a currency pair fluctuates and measures the dispersion of returns for a given security or market index.

You will come across different types of indicators, each focusing on a different thing. Most traders rely on volume indicators that tell you about price change and the market’s reaction towards it. Similarly, volatility can also tell you about the behavior of the stock price. The indicators have expanding and contracting ranges that depict uptrend and downtrend, respectively. They also tell us about the possible breakouts.

List of Volatility Indicators

Our list of volatility indicators includes the top five indicators that are preferred by traders. These have been further divided into two parts.

*The three indicators given below are based on daily high and low:

1. Chaikin Volatility: Developed by Marc Chaikin, this indicator equates volatility with the trading range for each period, lying between the highs and the lows. Here, trading gaps are not considered. It produces the best results when used with price envelopes or any of the moving averages.

As far as trading signals are concerned, you should check for any sharp increase in the security volatility before market tops and bottoms. If this is followed by low volatility, it shows that the market has lost interest. 

For example, consider the graph given below that shows Dow Jones Industrial Average with price envelopes set at 10%, exponential MA (21-days), and Chaikin Volatility.

As soon as the market enters a trading range after retreating from a new high, there is a Chaikin Volatility peak. We have a narrow band that shows low volatility, and the breakout from the range is also not accompanied by any significant volatility rise. Volatility rises only when the prices rise above the current high. Just before a new market peak is formed, there is a sudden rise in volatility. If there is a sharp decline, it signals that there could be a reversal.

2. Volatility Ratio: This ratio is similar to the ratio used in Technical Analysis by Jack Schwager to find wide-ranging days. Its default period is 14 days, but you can customize it by changing the Indicator Panel settings. 

Like other indicators, it works better with averages. You can find out the Volatility Ratio by using a simple formula:

True Range/Exponential Moving Average of True Range (past n period).

3. Average True Range (ATR): J. Welles Wilder developed this indicator. It compares everyday range and measures commitment, an excuse that buyers use to force price rise. It helps us to understand the eagerness of the market. You can get two basic signals from this indicator – high value and low values.

4. Volatility: It measures the coefficient of variation that is a statistical interpretation of volatility. It denotes closing price deviations from its SMA. It is used to assess the risk profile of managed funds. Its default period is of 125 days, which can be easily altered. 

When you divide the standard closing price deviation for a period of time with the average closing price for the same period, you get the volatility.

5. Bollinger Bands: Bollinger Bands have been named after their creator, John Bollinger. These bands are generally used to identify whether the market is overbought or oversold. By pairing them up with a momentum indicator, you can spot trading signals as well. 

Bollinger bands show us volatility through expansion and contraction. When the bands expand, it shows that the market is volatile. It is the perfect time to make trades. When the band’s contract, they show that the market is stable. A stable market might not be an ideal trading place, but it shows that the market will soon show some trends. 

You can also use these bands to spot entry and exit points. If the prices are over the upper band, it’s time to enter the market, and if they are below the lower band, you must exit.

Conclusion

There is nothing positive or negative in the trading market. It all depends on your strategies, calculations, and timing. Volatility is a necessary aspect of trading. Without it, there will be no significant profits. While new traders are usually discouraged from trading volatile instruments like crypto and Forex, with the help of these indicators and some other tools, you can turn the odds in your favor.

A breakout is anything unusual. Similarly, when a stock price goes beyond a defined resistance or support level with increased volume, it is a breakout. When the price rises after it breaks a certain level of resistance in Forex trading, we call it a Forex breakout. Forex breakouts can also occur when specific levels, like resistance and support level, the Fibonacci level, or the pivot points, are breached. 

Breakout trading is popular in Forex as it provides the risk-reward ratio. It also enables the traders to identify the position that they will hold. Traders and investors use breakout trading indicators to make their strategies. First, let’s know more about this term.

Defining a Breakout

Breakout represents a trend change in the trading time frame. For example, if the price is rising last 24 hours on an hourly chart, and if the price breaks the last 24 hours trendline, then breakout occurs. Breakout is sometimes very tricky to figure out because sometimes it is tough to distinguish between consolidation and breakout. 

It might be a word that they would never want to face or hear for a teenager, but it means a lot for a trader. Breakouts help in clearing many crucial levels on a chart. These are psychological levels that resonate with how the day trader might be feeling or what their sense might be telling them about price levels. We all know that trading is not a place that can be successfully run by emotions. Breakouts help in clearing such blocks. 

While the breakout day trading can help an ordinary trader transform into a brilliant trader, it can also make you face losses if you day trade quickly because the prices tend to revert to their original mark. This situation can be easily avoided by learning the art of patience. Trade only when you are certain that the odds are in your favor. You need to be able to distinguish between genuine and fake breakouts. Yes, it is easier said than done, but with the help of the best Forex breakout indicators available on various platforms, you can easily learn to do it.

How to Use Forex Breakout Strategy Indicators

Trading breakouts are not successful when the market is not trending. It will also work when the market conditions are range-bound; that is, the price action needs to be close to the upper end of the market range. If the market conditions are right, the following strategies and indicators can help you form successful trading strategies.

The best indicators for breakout trading

Breakout Trading Indicators are MACD, RSI, Volume indicator, and all oscillator indicators. Traders can draw a trendline on an oscillator indicator line. If the price level breaks the trendline, then the breakout will happen.

Below you can see the RSI trendline breakout example:

The best breakout trading indicators are:

• Moving Averages Convergence/Divergence (MACD) – One of the most common Forex breakout strategy indicators that traders use in the MACD. While this indicator appears simple and is easy to understand, it is highly dependable as well. Its histogram templates indicate a rise in momentum. Though it indicates a rise, it is used to identify a reversal in trends. You can do this by looking out for divergences that can be clearly spotted when indicators and prices move in opposite directions. As the MACD indicates momentum, you will see movement upon the triggering of the market trends. Many traders swear by the MACd as it helps them distinguish stable trends and those that could close without warning.
• Relative Strength Index (RSI) – RSI helps in confirming reversal breakouts. Similar to the MACD, you can use this indicator to spot the divergences. Once these divergences are identified on time, it becomes easy to predict if the trend will reverse or not. You can use this indicator to check how long a trend has been overbought or oversold. The market is considered overbought if the RSI value is above 70 and oversold if the value is 30.
• The Volume Indicator: Both veteran and new traders consider volume as an important trading indicator. You can conduct volume analysis with it and can help in the assessment of the trend health. Volume Weighted Moving Average (VWMA), a volume-related tool, can enable you to identify the breakouts.

Swing traders and intraday traders regularly participate in breakout trading. It works perfectly in a choppy market as it allows the traders to keep their investments safe.

To form a profitable trading strategy, it is important to know when to enter and exit the trade. While most traders use several tools to enter a trade, they often fail to comprehend when to exit. A perfect exit point helps traders do their job without added mental pressure as it relieves them from added mental pressure. While many tools and indicators can help you find the exit spot, the Average True Range Trailing Stops, or the ATR Trailing Stops, is deemed one of the best. Traders majorly use it to protect their capital. You can use it for individual trades where it can be used to lock in individual profits. When used alongside a trend filter, it can also be used to find entries.

What is ATR trailing stop?

ATR Trailing Stops or Average True Range Trailing Stop represents the process of setting trailing stops to close positions based on the average true range. Stop loss is determined based on a measure of the degree of price volatility (Average True Range)  in order to protect capital and lock in profits on individual trades.

How to Time Exits Using the ATR Trailing Stops

The concept of Average True Range was first introduced in 1978 by J. Welles Wilder. Stock or index volatility is measured using the ATR, and the detailed explanation could be found at the Average True Range. In the initial stages, Volatility Stops that follow trends were used with the Average True Range by Wilder. This experiment later helped in the development of Average True Range Trailing Stops.

ATR Trailing Stop Loss Strategy

You can use the ATR Trailing Stop to identify exit signals for both short and long positions:

• For a long position, the exit position will be a sell position. It would help if you exited when prices cross below the trailing line created by the ATR.
• For a short position, the exit position will be a buy position. It would help if you exited when prices move above the trailing line created by the ATR.

Example

The given graph shows the downtrend, which is highlighted with the ATR’s help. It also has the 63-day exponential MA that has been used here as the trend filter.

According to this graph:

• When the price gets closed below the ATR, but the exponential average remains close, you must go short.
• As soon as the price cross above the ATR trend line, you must exit.

Setting Up ATR Trailing Stops

The ATR time period can be set from 5 to 21 days. While the developer suggests setting it for 7 days for general trading, 21-days for long-term trading, and 5-days for short-term trading. For trailing stops, multiples ranging from 2.5 to 3.5 times the ATR. The lower multiples can get more susceptible to whipsaws. 

The default setting is 3X21 day ATR. The Closing Price is also set as default.

The ATR Formula

1. Calculate the ATR trailing stop using the following method:
2. Average True Range (ATR), a volatility indicator that compares each day’s range to measure commitment, is calculated.
3. The result is multiplied by the chosen multiple, 3XATR, in this example.
4. If there is an uptrend, the result from step 2 is subtracted from the Closing Price. This will be your stop for the next day.
5. The result from step 2 is added to the closing price if the prices close below the ATR stop. This is done to track short trade.
6. If the prices do not close below the ATR, keep subtracting 3XATR from every following day. This will continue till the price reverse below the ATR stop.

The Evolution of  the ATR Trailing Stops

The ATR stops are susceptible to whipsaws unless the trend is strong. This makes them more volatile than the rest. To avoid this volatility, you must use it with a trend filter. These stops are highly adaptive to changing market conditions than their counterparts, like the Percentage Trailing Stop. However, it yields similar results if you are applying it to stocks. Keep in mind that these need to be filtered for strong trends. 

There are two possible weaknesses of Volatility Stops and the original ATR. These are:

• In an uptrend, the stop moves downwards when the ATR widens. A ratchet mechanism can be deployed to deal with this weakness.
• The Reverse-and-Stop mechanism conjectures that you will be switching to a short position as soon as you stop out of a long position. The opposite is true, as well. When you are in a system that follows trends, it is widespread to exit early and get the next entry in the previous trade’s direction. You can deal with this problem by using ATR Bands.

ATR trailing stop EA

Please download ATR trailing stop EA.

This EA, please do not use for trading because trading rules are not defined. However, using this code, you can add entry rules and use ATR trailing stop for trading.

The main idea of ATR trailing EA is this code:

                    

//–

void SendOrder(double _stop,double _take)//Order send module buy/sell

{

//—

atr = iATR(Symbol(), atrTf, atrPer, 0);

atrSL =(atr * _stop / _point);

atrTP =(atr * _take / _point);

//—

switch(Ordertype)

{

case _buy: //Buy order

_mode =OP_BUY;

pricemode = Ask;

col = Green;

_type=”BUY”;

_SL = Ask – atrSL * _point;

_TP = Ask + atrTP * _point;

break;

case _sell://Sell order

_mode = OP_SELL;

pricemode = Bid;

col = Red;

_type=”SELL”;

_SL = Bid + atrSL * _point;

_TP = Bid – atrTP * _point;

break;

}

if(CheckMoneyForTrade(Symbol(),_mode,LotSize()))

Ticket=OrderSend(Symbol(),_mode,LotSize(),pricemode,5,0,0,WindowExpertName(),MagicNumber,0,col);

if(Ticket<1)

{

Print(“Order send failed, OrderType : “,(string)_type,”, errcode : “,GetLastError());

return;

}

else

Print(“OrderType : “,(string)_type,”, executed successfully!”);

if(OrderSelect(Ticket, SELECT_BY_TICKET, MODE_TRADES))

{

if(!OrderModify(OrderTicket(), OrderOpenPrice(), _SL, _TP, 0))

{

Print(“Failed setting TP/SL OrderType : “,(string)_type,”, errcode : “,GetLastError());

return;

}

else

Print(“Successfully setting TP/SL on OrderType : “,(string)_type);

}

}

//–

int Position()//This function prevents this adviser from interfere with other experts you may use on same account

{ // It checks and handle it’s own orders.

int dir=0;

for(int i = OrdersTotal() – 1; i >= 0; i–)

{

if(!OrderSelect(i, SELECT_BY_POS))

break;

if(OrderSymbol()!=Symbol()&&OrderMagicNumber()!= MagicNumber)

continue;

if(OrderCloseTime() == 0 && OrderSymbol()==Symbol() && OrderMagicNumber()==MagicNumber)

{

if(OrderType() == OP_SELL)

dir = -1; //Short positon

if(OrderType() == OP_BUY)

dir = 1; //Long positon

}

}

return(dir);

}

//–

                

Conclusion

It is important to use the right tools to spot exit signals. You will be in a better position by using the Average True Range Trailing Stops combined with a trend filter.

The trading market never operates without the involvement of a certain degree of risk. Prices of securities and instruments move constantly. Some securities are riskier than the others as they are more volatile. Volatility is used to define constant price movement where the prices can go up and down and come back again. Cryptocurrency is considered one of the most volatile investments. Volatility scares new traders away, but veterans know how to use it for their benefit. With the help of a good volatility indicator, they can strategize more accurately and make a profit. One such indicator is the Choppiness Index. 

Choppiness Index represents an indicator that determines how much market trading sideways or trading within a trend. It is developed by an Australian commodity trader Bill Dreiss. Choppiness Index uses a scale from 1 – 100 where the market is considered choppy as values near 100, over 61.80, and trending when values are lower than 38.20.

Developed by an Australian commodity trader, Bill Dreiss, the Choppiness Index is touted as one of the best volatility indicators. It was designed to highlight the trends of the market solely. It was not to be used to predict any price direction. It was named si because its developer wanted this indicator to determine the choppy (ranging) or not choppy (trending). 

Traders can know about the strength of a trend by reading the choppy scale between 0 and 100. The higher values stand for consolidation, while the lower values depict strong trends (directional trending).

Please download the Choppiness Index indicator.

Finding Trading Signals Using the Choppiness Index

It is effortless to set the Choppiness Index and use it to find trading signals. Though it’s default setting is of 14 days, you can easily customize it. Fibonacci values are usually used as extremes when the market is trendy or choppy. 

Once you have customized the days, you need to look at the scale to identify the signals. These signals will be between zero to a hundred. The scale is divided into three parts:

• The Higher Threshold: If the scale’s value is above 61.8, it is considered the higher threshold. It indicates consolidation in the market.
• The Lower Threshold: If the value on the scale is less than 38.2, it is considered the lower threshold. It shows strong signals. This means that the market has strong trends.
• The Midline: This index is used to measure current trend status. If the value on the scale is above 50, you can expect trends to remain choppy. On the contrary, if the value is below 50, the market trends tend to persist. This proves that the Choppiness Index lags in conveying the information about the actual trend.

How to Create Trading Strategies Using the Choppiness Index?

Note that a solitary indicator, tool, or oscillator cannot assist you in creating a strong trading strategy. You have to use every supporting tool in combinations. Here, we are using the Choppiness Index with the ADX (Average Directional Index) and the RSI (Relative Strength Index) to generate trading signals. We can expect these three to give us comprehensive buy and sell signals.

Buy signals are generated when the following takes place:

• The Relative Strength Index is more than 60.
• The Choppiness Index closes below 38.2 (lower threshold).
• The Average Directional Index cuts 20 levels from beneath. 

You can see all of the above happenings in the graph given below. There is a strong upside rally because all of the above points are taking place simultaneously.

Sell signals are generated when the following takes place.

• The Relative Strength Index is more than 40.
• The Choppiness Index closes once more below 38.2 (lower threshold).
• The Average Directional Index against cuts 20 levels from beneath. 

The only change taking place here is caused by RSI. Look at the following graph to see a strong all of the stocks of Religare Enterprises.

Conclusion

The Choppiness Index makes it easier for traders and investors to ranges and market trends. It is definitely an interesting tool to have on your trading platform. While it is great at measuring the current trends, the same cannot be said when it comes to actual trends. 

We will not advise you to use this or any other tool in isolation. When combined with other tools, it helps you in identifying different types of signals. If you are new to using the Choppiness Index, start with paper or small investment.

Developed by Welles Wilder, the Direction Movement System is a technical indicator that is rather complex to understand. You can read more about it in the author’s book. Despite being a difficult indicator to understand, it is deemed superior to the rest as it can overcome the one basic problem that is persistent with other indicators. Most indicators can work well in either a trending market or a ranging market. Such is not the case with the Direction Movement System. This indicator can identify the type of market and then provides signals that traders can use for trading.

What is Direction Movement System?

Direction Movement System represents an indicator that measures price move outside the N period of the trading range. Direction Movement System consists of three lines: The Average Directional Movement Index (ADX) that indicates whether the market is trending or ranging; the Positive Direction Indicator (+DI) measures upward trend movement; The Negative Direction Indicator (-DI) measures downward trend movement.

This system has three lines that collectively consider the ability of bears and bulls in moving prices beyond the last trading day’s trading range. Let’s read about these three lines:

• The first one is the Positive Direction Indicator, denoted as (+DI). It gives details about the movement related to an upward trend.
• The second one is the Negative Direction Indicator, denoted as (-DI). It gives details about the movement related to downward trends.
• The third one is the Average Direction Movement Index, denoted as (ADX). It helps you to assess whether the market is ranging or trending.

Directional Movement System and Trading Signals

This system has made way for the development of various trading systems. Dr. Alexander Elder presented many such systems in his book ‘Trading for a Living.’ Some of these systems are explained below:

Case 1: Go long when:

• The Positive Directional Indicator is above the Negative Directional indicator.
• The Average Direction Movement Index rises while (+DI) and ADX lay above (-DI).
• The Average Direction Movement Index rises from below the other two lines.
• Exit this position; the Positive Directional Indicator crosses below the Negative Directional indicator.

Case 2: Go Short when:

• The Negative Directional Indicator is above the Positive Directional indicator.
• The Average Direction Movement Index rises while (-DI) and ADX lay above (+DI).
• The Average Direction Movement Index rises from below the other two lines.
• Exit this position; the Negative Directional Indicator crosses below the Positive Directional indicator.

The Average Directional Movement System (ADX)

The declining ADX is indicative of a market that is losing its direction. When the ADX line falls below the other two lines, it shows that the market has become lifeless. Trading using the Directional Movement System should be avoided till the ADX has turned off bottom clearly. According to DR. Elder, traders should wait until the ADX line rises at least 4 steps off the low. For example, ADX rises to 20 from a low of 16. The longer the ADX remains below the other two lines, the stronger the trend will be.

When the ADX moves above -DI and +Di, it shows that market has become overheated. It would help if you took a profit in this case when the ADX starts turning downward again.

How to Set-Up the Directional Movement System

Welles Wilder’s Directional Movement System is not based on your standard moving averages (MA) formula. This indicator’s default setting also uses a 14-day smoothing, but it is very different from the 14-day Exponential Moving Averages. The standard EMA converts the time period into a fraction. A formula is used for this conversion; however, the Directional Movement System does not use that same formula. We have explained the formula below. 

You can go to the indicator panel available on your dashboard and change the default settings.

The Formula for Directional Movement System

Welles Wilder created several indicators, including the RSI and the ATR. While other indicators have similar formulae, the Directional Movement System is different and runs on a different formula. This is how it is calculated:

• First and foremost, you are required to calculate the present day’s Directional movement. If the DM (Directional Movement) is positive, that is, today’s high is more than yesterday’s high, we will say the price is moving upward. If the DM is negative, that is, today’s high is less than yesterday’s high, we will say the price is moving downwards. A positive and negative DM cannot occur together on the same day.
• The next step is to calculate the true range.
• Now, you need to calculate the indicators. You need to divide the directional indicators’ positive and negative values by the True Range for your chosen time period.
• Finally, calculate the individual components of the ADX. Start by calculating the Directional Indicator difference. Let’s assume that your chosen time period is 14 days, then take the difference between the positive and the negative DIs of that period. Count it as a positive number. Now, divide this number with the sum of the above two DIs to obtain the Directional Index.

Things to Keep in Mind

The Directional Movement System does not use the standard formula for calculating exponential moving averages. Therefore, you need to be cautious while setting your time period. Start with using shorter time periods.