Volatility Bands

Type

Self –adjusting Volatility Envelope

History

It is based on the concept of Bollinger Bands. The difference is that volatility is used as the bands instead of standard deviation.

How does it work?

Volatility Bands are an indicator that allows users to compare volatility and relative price levels over a period time. The indicator consists of three bands designed to encompass the majority of a security's price action.

Volatility Bands are plotted at volatility levels above and below a moving average. A distinct characteristic of Volatility Bands is how the spacing between bands varies based on the volatility of prices.

Trading Signals

Similar to Bollinger Bands, the bands are self-adjusting: widening during volatile markets and contracting during calmer or trending periods.

Volatility bands can help confirm trend, but they do not determine the future direction of a security. Similar to Bollinger bands, Volatility Bands serve two primary functions:

• Identify periods of high and low volatility
• Identify periods where securities are at relatively sustainable levels during consolidate or trending period.

The following characteristics apply to Volatility Bands:

• Trend reversals tend to occur after the bands expand, as volatility increases.
• When prices move outside the bands, a continuation of the current trend is implied.
• Bottoms and tops made outside the bands followed by bottoms and tops made inside the bands call for reversals in the trend.
• A move that originates at one band tends to go all the way to the other band. This observation is useful when projecting price targets.

Settings

Short term: 10 day Simple Moving Average, with bands at 1.5 volatility

Medium term: 20 day Simple Moving Average, with bands at 2 volatility

Long term: 50 day Simple Moving Average, with bands at 2.5 volatility

Sharechart Default:  20 day Simple Moving Average, with bands at 2 volatility

Example

Axa Asia Pacific Holdings Limited is used as an example below:

1.      Prices go alongside the upper band during up trend.

2.      Band expands during the reversal of up trend.

3.      Prices go alongside the lower band during down trend.