Measuring market volatility


There are at least three ways to measure market volatility using SharpCharts. Standard Deviation is the classic quantitative measure for volatility. This complex formula measures the deviation of closing prices from the mean. Chartists can also use Average True Range (ATR), which was developed by Wells Wilder an introduced in his classic 1978 book, New Concepts in Technical Trading Systems. This book also includes the Parabolic SAR, RSI and the Directional Movement Concept (ADX). Despite being developed before the computer age, Wilder's indicators have stood the test of time and remain extremely popular.

Average True Range uses the current high, current low and previous close to gauge volatility. Wilder incorporated the prior close so opening gaps would not be excluded from the volatility calculation. ATR was originally designed with commodities in mind. Futures can gap up or down on the open and remain locked limit, which means they do not move after the gap. Even though stocks cannot remain locked limit after a gap, ATR does a good job of gauging volatility. The chart below shows the S&P 500 ($SPX) with the Standard Deviation (14), Average True Range (14) and the S&P 500 Volatility Index ($VIX), which is the third measure of market volatility.

Click this image for a live chart

The Standard Deviation trended lower since April, surged in May and then oscillated around 2 the last few months. In contrast, Average True Range (14) moved lower in April, surged in May and then worked its way lower the last few months. Notice that the VIX followed this pattern. Also notice that the 10-day SMA of the VIX looks pretty much like 14-day ATR. Even though Standard Deviation is flat, the downtrends in ATR and VIX suggest that market volatility is falling.  Read more about ATR in our ChartSchool article.

Arthur Hill
About the author: , CMT, is a Senior Technical Analyst at He has written articles for numerous financial publications including Barrons and Stocks & Commodities magazine. Focusing predominantly on US equities and ETFs, his systematic approach of identifying trend, finding signals within the trend, and setting key price levels has made him an esteemed technician. In addition to his CMT designation, Arthur holds an MBA from the Cass Business School at City University in London. Learn More
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