a. Historical volatility (HV)
Historical volatility (HV) measures an asset’s past price fluctuations over a set
period, offering insight into its price dispersion. By comparing current volatility to
historical averages, traders gauge market conditions and risk levels. However, HV
doesn’t provide buy or sell signals or indicate overbought/oversold levels; it simply
highlights past volatility.
HV is calculated by averaging the deviations of an asset’s price from its mean
over a chosen period. It is visualized as a line on platforms like TradingView, moving
up and down to reflect changing volatility.
Figure 1: Historical volatility calculation (source: realtrading.com)
Figure 2: Historical volatility is visualized as a line on TradingView (source:
fidelity.com)
Rising HV signals increased price fluctuations and potential market
uncertainty, making it a useful tool for understanding volatility. Nonetheless, HV
should be used with other indicators like ATR, Bollinger Bands, or moving averages
for a more complete market analysis. While HV is valuable for long-term risk
assessment, it is less effective for short-term trading, as it doesn’t identify specific
trading opportunities.
b. Average True Range (ATR)
The Average True Range (ATR) is a widely used technical indicator for
measuring market volatility by analyzing an asset's full price movement, including
gaps between sessions. Unlike simply measuring the day’s high and low, ATR
