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The difference between Momentum and Volatility, and how to use it in your trading

 

The misunderstandings and misconceptions between volatility and momentum can lead to expensive trading mistakes and can even result in totally flawed chart and market analysis and trading decisions.

Volatility and momentum are two fundamentally different things and we will explore the differences between the two concepts, how to measure volatility and momentum and how to use them for effective trading decisions.

 

What is volatility?

Volatility describes how much price fluctuates around a mean. If you would use a moving average and see price going back and forth around the moving average, markets are in a high volatility environment. Furthermore, if candlesticks have relatively long candle shadows, compared to the candle body, it also signals a volatile market.

Thus, volatility is also often referred to as a risk indicator because high price fluctuations can signal indecision in the markets and the powers between buyers and sellers are constantly shifting.

 

What is momentum?

To a certain degree, momentum

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Average True Range – Stops, Profit Targets and Signal Confirmation

 

Average True Range (ATR) is a concept that was developed by J. Welles Wilder and presented in his 1978 book, New Concepts in Technical Trading Systems. ATR is a measure of volatility; it is a 14-period average of True Range, which is calculated using the formula:

True Range is the greatest of:
1. The current high minus the current low.
2. The absolute value of the current high minus the previous close.
3. The absolute value of the current low minus the previous close.

The ATR doesn’t give buy and sell signals, but it may be useful for calculating profit target and stop-loss levels, which are reasonable for the prevailing market conditions. It may also serve as a confirming indicator for signals generated by other trading systems, such as candlestick or Bollinger Band® analysis.

Perhaps the most important aspect of ATR, for those learning about it for the first time, is that its

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