COMMODITY FUTURES CHART VOLATILITY INDICATORS

Volatility is a general term used to describe the magnitude, or size, of day-to-day price fluctuations independent of their direction. Generally, changes in volatility tend to lead changes in prices. The following indicators can be used to measure volatility:

:::::>Average True Range

Average True Range is the average of several true ranges over a defined time period. True range is the greatest of: today's high from today's low, yesterday's close from today's high and yesterday's close to today's low.

:::::>Bollinger Bands

Bollinger Bands are envelopes around prices which are plotted at standard deviation levels above and below a moving average. (Standard deviation is a measure of volatility.) The envelope widens when the commodity becomes more volatile and narrows when less volatile. As an indicator, sharp price changes tend to occur after bands tighten (after periods of low volatility). When prices move outside the bands, it can imply trend continuation. A move that originates on one side of band will generally move to the other side band.

It is a good idea to use Bollinger Bands with another indicator, such as RSI. Generally, when upward prices touch the upper Bollinger Band, and RSI is below 70, the trend will continue. However if upward prices touch the upper Bollinger Band and RSI is above 70, the trend may reverse. (The converse is true for downward prices touching the lower Bollinger Band and RSI above/below 30.

:::::>Moving Average (variable)

Variable moving averages are exponential moving averages that automatically adjusts the smoothing constant based on the volatility of the data series. High volatility gets a larger smoothing constant so that more weight is given to current data. Low volatility gets a smaller smoothing constant so that less weight is given to current data.