Indicators

Volatility

Complete guide to all volatility indicators available in MagiaTrade

Volatility Indicators

Volatility indicators measure the rate and magnitude of price changes, helping traders understand market dynamics, set appropriate stop-losses, and identify potential breakout opportunities.

Available Volatility Indicators

Bollinger Bands

Bollinger Bands are a volatility indicator that creates dynamic support and resistance levels based on standard deviation from a moving average.

Overview

Created by John Bollinger, this indicator consists of three lines: a middle band (moving average) and two outer bands that expand and contract based on market volatility. The bands help identify overbought/oversold conditions and potential breakouts.

Components

Middle Band: Simple Moving Average (typically 20 periods)
Upper Band: Middle Band + (Standard Deviation × Multiplier)
Lower Band: Middle Band - (Standard Deviation × Multiplier)

Configuration

indicator: Bollinger_Bands
period: 20          # MA period
std_dev: 2          # Standard deviation multiplier
ma_type: SMA        # Moving average type

Parameters

Parameter	Default	Range	Description
`period`	20	5-50	Moving average period
`std_dev`	2	1-3	Standard deviation multiplier
`ma_type`	SMA	SMA/EMA	Type of moving average

Interpretation

Band Interaction

Price at Upper Band: Potential overbought/resistance
Price at Lower Band: Potential oversold/support
Price at Middle Band: Neutral, often acts as support/resistance

Band Width

Narrow Bands (Squeeze): Low volatility, potential breakout coming
Wide Bands: High volatility, trending market
Expanding Bands: Increasing volatility
Contracting Bands: Decreasing volatility

Trading Signals

Mean Reversion

Buy Signal: Price touches lower band and reverses
Sell Signal: Price touches upper band and reverses

Breakout Trading

Bullish Breakout: Price closes above upper band with volume
Bearish Breakout: Price closes below lower band with volume

Band Squeeze

Setup: Bands at narrowest point in 6 months
Signal: Trade the breakout direction

Bollinger Band Strategies

Band Bounce

strategy: BB_Bounce
indicators:
  - Bollinger_Bands:
      period: 20
      std_dev: 2
rules:
  - Buy at lower band touch with RSI < 30
  - Sell at upper band touch with RSI > 70

Squeeze Breakout

strategy: BB_Squeeze
indicators:
  - Bollinger_Bands:
      period: 20
      std_dev: 2
  - ATR:
      period: 14
conditions:
  - Identify squeeze: Band width < ATR
  - Trade breakout direction with volume

Advanced Techniques

Double Bollinger Bands

Use two sets of bands (1 and 2 standard deviations) to create zones:

Buy Zone: Between -1 and -2 SD
Sell Zone: Between +1 and +2 SD
Neutral Zone: Between -1 and +1 SD

%B Indicator

Measures where price is relative to the bands:

%B = (Price - Lower Band) / (Upper Band - Lower Band)

%B > 1: Above upper band
%B < 0: Below lower band
%B = 0.5: At middle band

Best Practices

Tip: Bollinger Bands work best when combined with momentum indicators like RSI or MACD for confirmation.

Market Conditions

Trending Markets: Use band walks (price hugging bands)
Ranging Markets: Trade band bounces
Low Volatility: Watch for squeeze setups

Parameter Optimization

Short-term (10-period): More signals, more noise
Standard (20-period): Balanced approach
Long-term (50-period): Fewer, more reliable signals

Common Patterns

Band Walk

Price "walks" along upper or lower band in strong trends:

Upper Band Walk: Strong uptrend
Lower Band Walk: Strong downtrend

M-Tops and W-Bottoms

M-Top: Double top with second peak below upper band
W-Bottom: Double bottom with second low above lower band

Squeeze Patterns

Volatility Squeeze: Bands narrow significantly
Squeeze Release: Explosive move after squeeze
False Breakout: Initial breakout fails, reverses

Advantages

Visual representation of volatility
Dynamic support/resistance levels
Multiple trading strategies possible
Works in various market conditions

Limitations

Lagging indicator
False signals in choppy markets
Doesn't predict direction, only volatility
Requires confirmation from other tools

Combining with Other Indicators

Powerful combinations:

RSI: Confirm overbought/oversold
Volume: Validate breakouts
MACD: Momentum confirmation
ATR: Volatility comparison

AI Agent Configuration

agent_config:
  indicators:
    - Bollinger_Bands:
        period: 20
        std_dev: 2
  prompt: |
    Monitor Bollinger Bands for opportunities:
    
    Mean Reversion Setup:
    - Buy when price touches lower band
    - Confirm with RSI oversold
    - Target: Middle band
    
    Breakout Setup:
    - Identify band squeeze (narrow width)
    - Enter on breakout with volume
    - Stop: Opposite band

Bollinger Bands %B
Bollinger Bands Width
Keltner Channels
Donchian Channels

Further Reading

ATR (Average True Range)

Measures market volatility without indicating price direction, providing crucial information for risk management and position sizing.

Overview

ATR calculates the average of true ranges over a specified period, helping traders understand how much an asset typically moves.

Configuration

indicator: ATR
period: 14          # Calculation period

Parameters

Parameter	Default	Range	Description
`period`	14	5-50	Number of periods for averaging

Interpretation

Volatility Levels

High ATR: High volatility periods
Low ATR: Low volatility periods
Rising ATR: Increasing volatility
Falling ATR: Decreasing volatility

Applications

Stop-loss placement: Use ATR multiples for stops
Position sizing: Adjust size based on volatility
Volatility filters: Avoid low volatility periods
Breakout confirmation: High ATR confirms breakouts

Trading Applications

Risk Management

Stop loss: Set stops at 2-3 × ATR from entry
Position sizing: Reduce size in high ATR periods
Risk assessment: Higher ATR = higher risk

Market Analysis

Volatility cycles: Identify expansion/contraction
Breakout trading: High ATR suggests strong moves
Mean reversion: Extreme ATR levels may revert

Best Practices

Pro Tip: Use ATR for position sizing - risk the same dollar amount by adjusting position size based on current ATR.

Period Selection

Short-term: 7-10 periods for active trading
Standard: 14 periods for most applications
Long-term: 20-30 periods for position trading

Example Strategies

ATR-Based Stop Loss

strategy: ATR_Risk_Management
indicators:
  - ATR:
      period: 14
  - Moving_Average:
      period: 20
      type: EMA
rules:
  - Buy when price crosses above EMA
  - Set stop loss at entry - (2 × ATR)
  - Set target at entry + (3 × ATR)

Volatility Breakout

strategy: ATR_Breakout
indicators:
  - ATR:
      period: 14
  - Bollinger_Bands:
      period: 20
      std_dev: 2
rules:
  - Wait for low ATR (below 20-day average)
  - Buy breakout above upper BB when ATR starts rising
  - Use ATR for stop placement

Advantages

Objective volatility measurement
Essential for risk management
Works in all market conditions
Helps with position sizing
Universal application across assets

Limitations

Doesn't indicate direction
Lagging indicator
May lag sudden volatility changes
Requires combination with directional indicators

Combining with Other Indicators

Works excellently with:

All trend indicators: For stop-loss placement
Bollinger Bands: Volatility confirmation
Breakout systems: Movement validation
Support/Resistance: Risk/reward calculation

AI Agent Configuration

agent_config:
  indicators:
    - ATR:
        period: 14
    - Moving_Average:
        period: 20
        type: EMA
  prompt: |
    Use ATR for intelligent risk management:
    
    Buy when:
    - Price crosses above 20 EMA
    - ATR is not extremely high (< 2x recent average)
    - Volume confirms the move
    
    Risk management:
    - Stop loss: Entry - (2 × current ATR)
    - Position size: Risk same $ amount regardless of ATR
    - Target: Entry + (2.5 × current ATR)
    
    Avoid trading when ATR is extremely low (potential breakout pending)

Bollinger Bands
Keltner Channels
Standard Deviation

Keltner Channels

Volatility-based envelope similar to Bollinger Bands but using Average True Range (ATR) for channel width calculation.

Configuration

indicator: Keltner_Channels
period: 20          # EMA period
multiplier: 2       # ATR multiplier
atr_period: 10      # ATR calculation period

Parameters

Parameter	Default	Range	Description
`period`	20	10-50	EMA period for center line
`multiplier`	2	1-5	ATR multiplier for bands
`atr_period`	10	5-20	ATR calculation period

Interpretation

Price above upper: Strong bullish momentum
Price below lower: Strong bearish momentum
Price returns to middle: Mean reversion
Channel width: Volatility measure

Trading Signals

Buy: Price breaks above upper channel
Sell: Price breaks below lower channel
Mean reversion: Price returns to center EMA

ATR
Bollinger Bands

Standard Deviation

Statistical measure of how much price varies from its average, providing objective volatility measurement.

Configuration

indicator: Standard_Deviation
period: 20

Interpretation

High values: High volatility
Low values: Low volatility
Sudden spike: Potential market event

Bollinger Bands
ATR

Bollinger Bands %B

Shows where the current price is relative to the Bollinger Bands as a percentage.

Configuration

indicator: BB_Percent_B
period: 20
std_dev: 2

Interpretation

%B > 1: Price above upper band
%B < 0: Price below lower band
%B = 0.5: Price at middle band

Bollinger Bands
BB Width

Bollinger Bands Width

Measures the distance between the upper and lower Bollinger Bands to identify volatility cycles.

Configuration

indicator: BB_Width
period: 20
std_dev: 2

Interpretation

High width: High volatility
Low width: Low volatility (squeeze)
Expanding: Increasing volatility

Bollinger Bands
BB %B

Chaikin Volatility

Measures the rate of change in the Average True Range to identify changing volatility conditions.

Configuration

indicator: Chaikin_Volatility
period: 14
roc_period: 10

Interpretation

Above zero: Increasing volatility
Below zero: Decreasing volatility
Extreme values: Volatility extremes

ATR
Historical Volatility

Historical Volatility

Calculates the statistical volatility of price returns over a specified period, often annualized.

Configuration

indicator: Historical_Volatility
period: 20
annualize: true

Interpretation

Higher values: More volatile period
Lower values: Less volatile period
Compare: To implied volatility in options

Standard Deviation
ATR

Standard Error

Statistical measure that indicates the accuracy of trend line estimates and regression calculations.

Configuration

indicator: Standard_Error
period: 20

Interpretation

Lower values: More reliable trend
Higher values: Less reliable trend
Statistical significance: Assessment measure

Standard Error Bands
Linear Regression

Standard Error Bands

Creates upper and lower bands around a linear regression line using standard error calculations.

Configuration

indicator: Standard_Error_Bands
period: 20
deviations: 2

Interpretation

Price at upper band: Potential resistance
Price at lower band: Potential support
Inside bands: Normal price range

Standard Error
Linear Regression

Donchian Channels

Creates channels by plotting the highest high and lowest low over a specified period.

Configuration

indicator: Donchian_Channels
period: 20

Interpretation

Price at upper: Potential breakout/resistance
Price at lower: Potential breakdown/support
Breakouts: Trend continuation signals

Keltner Channels
Price Channel

Envelopes

Creates upper and lower bands around a moving average using fixed percentage values.

Configuration

indicator: Envelopes
period: 20
percentage: 2.5
ma_type: SMA

Interpretation

Price at upper: Potential overbought
Price at lower: Potential oversold
Envelope breaks: Strong price movements

Bollinger Bands
Moving Average

Moving Average Channel

Creates a channel using moving averages of the high and low prices over a specified period.

Configuration

indicator: MA_Channel
period: 20
ma_type: SMA

Interpretation

Price above channel: Bullish breakout
Price below channel: Bearish breakdown
Inside channel: Range-bound market

Donchian Channels
Price Channel

Price Channel

Creates a channel by connecting the highest and lowest prices over a lookback period.

Configuration

indicator: Price_Channel
period: 20

Interpretation

Channel slope: Trend direction
Channel width: Volatility measure
Breakouts: Potential trend changes

Donchian Channels

Volatility Close-to-Close

Measures volatility based solely on closing price changes, excluding overnight gaps.

Configuration

indicator: Volatility_Close_to_Close
period: 20

Interpretation

Higher values: More volatile closes
Lower values: Stable closes
Overnight gap risk: Excluded from calculation

Historical Volatility

Volatility Index

Composite measure that combines multiple volatility inputs to provide a comprehensive volatility ranking.

Configuration

indicator: Volatility_Index
period: 14

Interpretation

Higher values: Higher volatility
Lower values: Lower volatility
Relative ranking: Compare across periods

ATR

Volatility OHLC

Calculates volatility using the full Open-High-Low-Close price data for more comprehensive analysis.

Configuration

indicator: Volatility_OHLC
period: 20

Interpretation

Incorporates intraday range: More comprehensive than close-only
Better volatility estimation: Uses all price information

ATR
Historical Volatility

Volatility Zero Trend Close-to-Close

Volatility measure that removes the trend component to provide pure volatility measurement.

Configuration

indicator: Volatility_Zero_Trend
period: 20

Interpretation

Removes trend component: Pure volatility measure
Better for option pricing: Risk-neutral measurement

Volatility Close-to-Close

Momentum

Complete guide to all momentum indicators available in MagiaTrade

Volume

Complete guide to all volume indicators available in MagiaTrade