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.

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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.

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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.