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Whale Trading

Volatility Indicators: Reading Risk with Bollinger Bands, ATR, and ADR

In this chapter we focus on volatility indicators:

  • Bollinger Bands,
  • ATR (Average True Range),
  • ADR (Average Daily Range),
  • and simple volatility proxies like candle size, gaps, and spikes.

The mindset is:

Not “price touched the upper band, so short now,”
but:
“How big and how fast is this market moving,
and have I adjusted my risk to that reality?”

Volatility tools are much better at measuring
magnitude and risk than at predicting direction.

The diagram below shows:

  • top: price with Bollinger Bands going into a narrow squeeze and then an expansion,
  • bottom: ATR staying flat, then rising sharply in the same period.

Once you understand this structure, you can better answer:

  • “Are we in the quiet before the move, or
  • already in the middle of an expansion?”
  • “Should I cut or increase my position size in this environment?”

1. What Are Volatility Indicators? – “How Big, How Fast”

Volatility is essentially:

how big and how fast price moves.

Volatility indicators:

  • focus on range and speed, not on up or down,
  • and help you with:
    • risk management,
    • strategy selection, and
    • timeframe selection.

In practice they are tightly connected to:

  • risk-management:
    • stop distance, target distance, position size,
  • strategy:
    • trend-following vs range strategies,
  • timeframes:
    • choosing appropriate timeframes for your style.

2. Bollinger Bands: Average ± Standard Deviation

Bollinger Bands consist of:

  • a middle line: usually an N-period moving average,
  • upper/lower bands: MA ± k × standard deviation.

Intuitively they show:

  • how far price has moved above/below its recent mean, and
  • whether the current range is wide or narrow.

2-1. Bandwidth and the Squeeze

The most important information is often
how narrow or wide the bands are.

  • Bands narrowing → candles getting smaller and quieter.
  • Bands suddenly expanding → volatility breaking out.

In particular:

  • an extreme squeeze followed by
  • a move where candles start hugging the outer band

is structurally similar to the
triangle breakouts we discussed in
triangle.

2-2. Don’t Treat a Band Touch as an Automatic Reversal Signal

Common mistake:

  • upper band touch = sell,
  • lower band touch = buy.

In strong trends:

  • price can ride the upper band for a long time, or
  • ride the lower band in a downtrend.

So it’s better to think of Bollinger Bands as:

  • a way to see how extreme a move is relative to recent behavior, and
  • whether volatility is:
    • contracting (quiet regime), or
    • expanding (active regime),

rather than as a strict reversal tool.

3. ATR (Average True Range): Volatility via Candle Size

ATR is based on True Range, which is usually:

  • today’s high – low,
  • or max of that and
    • |high – previous close|,
    • |low – previous close|.

ATR is then the average of that range over N periods.

3-1. Interpreting ATR as “Average Daily Move”

If the daily ATR is 50,
this roughly means:

“Over the last N days,
the typical daily move has been about 50 points.”

This gives you a yardstick:

  • If ATR is 50 and your stop is only 10 points,
    • you’re trying to survive in 1/5 of normal noise.
  • If your targets are tiny compared to ATR,
    • you might be trading too tight and frequent.

3-2. Rising vs Falling ATR

The diagram below compares:

  • a trending vs ranging price environment, and
  • ATR behavior underneath.

Typical patterns:

  • new or ending trends often coincide with rising ATR,
  • extended ranges often see gradually declining ATR.

This matches the compression–expansion structures
we discussed in triangle
and part-4.

4. ADR (Average Daily Range): Direct View on Daily Range

ADR is:

  • the average of (high – low) over N days.

It’s similar to ATR in spirit, but:

  • handles gaps and intra-day details slightly differently.

Traders often use ADR to answer:

  • “How many percent does this asset typically move per day?”
  • “Is my target realistic compared to its normal daily range?”

Example:

  • a coin has an average ADR of 3%,
  • if you regularly aim for 10% daily targets,
  • your expectations and risk may not line up with reality.

5. Linking Volatility Indicators to Risk Management

The real value of volatility indicators appears
when combined with risk-management.

5-1. Adjusting Position Size

  • When ATR/ADR are elevated:
    • consider smaller position sizes for the same stop distance.
  • When ATR/ADR are very low:
    • stops that are too tight may get hit
      simply by normal noise.

5-2. Designing Stops and Targets

Many traders frame:

  • stops as some multiple of ATR,
  • targets as a larger multiple,

while still respecting:

  • structure (pattern, support/resistance),
  • and account-level risk.

Example (only a sketch, not a rule):

  • stop: 1 × ATR,
  • first target: 1.5–2 × ATR,
  • second target: 3 × ATR or more,

always within your overall risk rules.

5-3. Strategy Choice: Trend-Following vs Range Trading

  • When Bands/ATR are contracting,
    shorter-range scalps and range trades can make sense.
  • When Bands/ATR are expanding sharply,
    pattern/structure permitting,
    breakout strategies like
    breakout-fakeout
    often fit better.

6. Checklist for Using Volatility Indicators

When you have volatility tools on your chart, ask:

  1. “Is this market quieter or louder than usual?”

  2. “Are my stops and targets
    too tight or too wide compared to recent ATR/ADR?”

  3. “Given this volatility,
    is my position size within
    risk-management limits?”

  4. “Is this volatility spike/decline
    more likely the start, middle, or late phase of a move?”

In the next chapter,
other, we’ll cover:

  • Fibonacci-based tools, volume-related indicators, and other auxiliary tools,

treating them not as standalone buy/sell switches, but as:

ways to refine an existing view based on
price, patterns, trend, and volatility.