What is volatility? Contracting and expanding ranges
Volatility is the size of price changes; it describes how much price moves, not which way. Markets swing between calm and active periods: ranges contract, then expand. The same percentage move can be unusual in a calm market and ordinary in a volatile one.
What is volatility?
Volatility measures how much price changes over a period. It does not care whether price goes up or down. A rising market and a falling market can each have high or low volatility.
On a chart, volatility is easiest to see in the size of the candles. Short bodies and short wicks describe a calm period; long bodies and long wicks describe an active one. Volatility is always stated for a timeframe: a day that looks busy on the 1H chart can be a single medium-sized candle on the 1D chart.
Contraction and expansion
Volatility does not stay constant. Price moves in a narrow range with small candles for a while, then leaves the range with a few large candles, and the move stays wide for some time. After that the candles shrink again. This cycle of contraction and expansion shows up in almost every market and on every timeframe.
Contraction is often seen in a sideways market or inside a pattern such as a triangle or a pennant. Expansion usually starts with a breakout or a sharp move. A quiet period can hint that a move is coming, but it does not say when or in which direction.
How volatility is usually measured
- Range: the difference between a candle's high and low. The simplest measure; it shows how much a single candle moved.
- ATR (Average True Range): the average of the candles' true range, which also accounts for gaps. The default setting is 14 candles; it gives how much price typically moves, in price units.
- Standard deviation: measures how far closes stray from their average. Bollinger Bands use it; the bands narrowing and widening shows volatility changing.
- Percentage change: relates the move to the price. It makes assets at different price levels, or different periods, easier to compare.
All of these measures are calculated from past prices. They say how much price has moved so far, not how much it will move next.
The same move, a different meaning
A 3% move is not large or small on its own. In a calm market where candles have moved less than 1% for days, 3% is an unusual move. In an active period where candles move 5% a day, the same move is ordinary.
So the size of a move is read together with that market's usual volatility at the time. Volatility varies a lot between crypto assets: the large coins often move less, low-volume ones more. The same asset can also show very different volatility in different periods.
What it shows, what it does not prove
What it shows
- How much price has moved on this timeframe
- Whether the market is in a calm or an active period
- Whether a move is large or small compared with the market's usual volatility
What it does not prove
- Which way price will go
- When a contraction will end or how long an expansion will last
- That high volatility signals a reversal or low volatility a continuation
The MarketLevelMap view
How it relates to zones
Volatility affects how wide a zone should be read. In an active period price leaves longer wicks as it moves in and out of a zone; a wick briefly reaching beyond the zone says less than it would in a calm period. That is why reading a zone as a band rather than a single line is a simple way of allowing for volatility.
In a calm period price can squeeze inside a zone, or between two zones, with small candles. The expansion after such a contraction often starts with one of the band's edges being tested. A breakout is still judged on the close.
Often confused with
For general information only. Not investment advice.Last updated: