Free Trading School · Level 7: Technical Indicators
Volatility tools: Bollinger Bands and ATR
Bollinger Bands draw a 20-period moving average with a band two standard deviations above and below it. When volatility rises the bands widen; when the market goes quiet they squeeze together. Quiet periods tend to be followed by big moves.
The Average True Range (ATR) measures the average size of a candle, including gaps, over the last 14 periods. It does not show direction, only how much the market typically moves. That makes it the best tool for placing stops.
A stock trades at $80 with a daily ATR of $2. A stop 1.5 ATR away sits $3 below the entry, at $77. On a quieter stock with an ATR of $0.80 the same rule gives a stop $1.20 away. Each stop matches the market's normal noise.
Let volatility set your stop distance, then let position sizing keep the risk fixed.
Quick answers
Bollinger Bands draw a 20-period moving average with a band two standard deviations above and below it. When volatility rises the bands widen; when the market goes quiet they squeeze together. Quiet periods tend to be followed by big moves.
Let volatility set your stop distance, then let position sizing keep the risk fixed.
ATR. ATR measures typical movement, so stops can sit outside normal noise.
Next lesson: Why chart patterns work (sometimes)