Methods to Measure Stock Volatility, Market Volatility Analysis

Friday, July 24, 2009

Methods to Measure Stock Volatility

Volatility is one of the major profit determining factors which should be measured correctly for executing a successful trade. Different traders use different indicators for measuring the volatility associated with an instrument. Some popular ones are discussed here.

Stock Beta: Beta is the comparison of a stock volatility to market volatility. The greater the beta the higher the volatility. Beta value mainly favors long-term traders and investors (mainly CAPM investors) as it does not tell anything about short-term stock volatility.
Bollinger bands: Bollinger bands and other standard deviation indicators mainly favor swing to intermediate term traders. They can also be used for a variety of purposes such as generating signals, finding supports and resistances, and finding trends.
ATR indicator: Average True Range indicator measures only the volatility and is used by many traders to find entry points and stop-loss levels. ATR% and time series of ATR% can offer better results.
Chaikin Oscillator: Chaikin accumulation distribution oscillator is an indicator which uses closing prices to measure market volatility. Though lesser known, it is an effective indicator to analyze money flow, confirm trends and predict trend changes.
Moving averages: There are a number of indicators based on moving average, which respond differently to market volatility with reference to the smoothing factor they use. MA indicators are extensively used by all types of traders trading all kinds of instruments.