Volatility Indicators

What are Volatility Indicators?

Volatility indicators measure how much the price is moving -- the rate and magnitude of price changes, regardless of direction. A market can be volatile while going up, going down, or going nowhere. Volatility is about the size of the swings, not where they end up.

This information is useful for several things: setting appropriate stop-loss levels (wider in volatile markets, tighter in calm ones), deciding position sizes (smaller when volatility is high), and identifying when a breakout may be imminent (volatility contraction followed by expansion).

The Indicators

Bollinger Bands

Three lines overlaid on the price chart: a simple moving average in the middle, with an upper band and lower band placed a set number of standard deviations above and below. When volatility is low, the bands squeeze together. When volatility is high, they expand. The bands adapt to the market's current conditions automatically.

Read the full Bollinger Bands deep-dive >

ATR (Average True Range)

Measures volatility in absolute price terms by averaging the True Range (which accounts for gaps between candles) over a lookback period. ATR does not appear on the price chart -- it is displayed in a separate panel as a single line. Higher ATR means larger candle-to-candle moves.

Read the full ATR deep-dive >

NATR (Normalized ATR)

ATR expressed as a percentage of the closing price rather than an absolute value. This makes it possible to compare volatility across assets at different price levels. A stock at $10 and a stock at $500 might both have a NATR of 2%, meaning each moves about 2% of its price per candle on average -- even though their ATR values in dollar terms are very different.

True Range

The single-candle building block of ATR. True Range is the greatest of three values: the current high minus the current low, the absolute difference between the current high and the previous close, or the absolute difference between the current low and the previous close. The second and third options capture gaps -- when the current candle opens well above or below the previous close.

True Range is rarely used on its own. It is available in Simula as a standalone indicator, but most traders use ATR (the smoothed average) instead for a more stable reading.

Reference Table

Common Mistakes

Confusing volatility with direction

High ATR or wide Bollinger Bands do not mean the price is falling. They mean the price is making large moves. A strong uptrend with big daily gains has high volatility just like a crash does.

Using fixed stop-loss levels regardless of volatility

A 2% stop-loss might work in a low-volatility environment but get triggered by normal noise in a high-volatility environment. ATR-based stops (e.g., 2x ATR) adapt automatically to the current market conditions. This is one of the most practical uses of volatility indicators.

Comparing ATR across different assets

ATR is in absolute price units. An ATR of 5 on a $50 stock (10% of price) is much more volatile than an ATR of 5 on a $500 stock (1% of price). Use NATR (percentage-based) when comparing volatility across assets at different price levels.

Where to Go Next

Bollinger Bands -- volatility bands on the price chart with squeeze/breakout signals.

ATR (Average True Range) -- absolute volatility measurement for stop placement and position sizing.

Volatility (Metric) -- the portfolio-level volatility metric in your backtest results.

Mean Reversion -- strategies that use Bollinger Bands to identify stretched prices.