How to Gauge Volatility for Q3

Half the year is over, and we are still dealing with extraordinary volatility levels, as we have been since the onset of the pandemic. Equity market ranges are at all-time highs and movement has been erratic to say the least. Traders must adapt to current volatility because risk and reward increase when momentum indicators reverse frequently.

At the end of each quarter I recommend comparing historic and current average true ranges (ATRs). This will make it easier to identify trend potential or when a market is overbought or oversold. When recent day and week ranges are far below the benchmark (long-term average), odds increase for a breakout or onset of a trend. Under these circumstances buying options or the underlying tend to be better strategies. On the other hand, when recent ranges are far above the standard, a consolidation phase typically follows. Thus, selling premium or executing credit spreads may be better strategies.

The ATRs I prefer for comparisons are:

  • 14 days vs. 200
  • 9 weeks vs. 50
  • 7 months vs. 18
  • 5 quarters vs. 9

Create your own spreadsheet that includes average ranges of your favorite stocks or commodities. A good trader prepares and has pertinent data available to set risk and targets immediately after a position has been entered. To get you started see the spreadsheet below of some popular ETFs.

John Seguin, Market Taker Mentoring

Trader Education