{
  "Gem": "The Best Volatility Indicator For Trading\nA Step-by-Step Guide to This Famous Indicator\nSofien Kaabar, CFA\nSofien Kaabar, CFA\n\n·\nFollow\n\n6 min read\n·\nNov 13\n200\n\n\n1\n\n\n\n\nImage source: www.pxfuel.com\nTrading is a combination of four things, research, implementation, risk management, and post-trade evaluation. The bulk of what we spend our time doing is the first two, meaning that we spend the vast majority of the time searching for a profitable strategy and implementing it (i.e. trading).\n\nHowever, we forget that the pillar of trading is not losing money. It is even more important than gaining money because it is fine to spend time trading and still have the same capital or slightly less than to spend time trading and find yourself wiped out.\n\nIn this article, we will discuss the third pillar as a way of enhancing returns and capital protection. Every trading strategy must be accompanied by its own personalized risk management protocol. One such protocol (or indicator) is the famous average true range.\n\nThe Concept of Volatility\nTo understand the average true range, we must first understand the concept of volatility. It is a key concept in finance, whoever masters it holds a tremendous edge in the markets.\n\nUnfortunately, we cannot always measure and predict it with accuracy. Even though the concept is more important in options trading, we need it pretty much everywhere else. Traders cannot trade without volatility nor manage their positions and risk. Quantitative analysts and risk managers require volatility to be able to do their work. Before we discuss the different types of volatility, why not look at a graph that sums up the concept? Check out the below image to get you started.\n\n\nComparison of a high volatility simulated time series and a low volatility simulated time series.\nThe different types of volatility around us can be summed up in the following:\n\nHistorical volatility: It is the realized volatility over a certain period of time. Even though it is backward looking, historical volatility is used more often than not as an expectation of future volatility. One example of a historical measure is the standard deviation, which we will see later. Another example is the Average True Range, the protagonist of this…\nCreate an account to read the full story.\nThe author made this story available to Medium members only.\nIf you’re new to Medium, create a new account to read this story on us.\n\n"
}