When you apply Bollinger Bands, you’ll
see three lines (Figure 2). The upper and
lower bands represent standard deviations—usually two—above and below the
moving average, which is the middle line.
In addition to vol, Bollinger Bands also
indicate the direction of price. When price
is at the higher band, it indicates that price
is high. When price is at the lower band, it
indicates that price is low.
The bands have a tendency to widen and
narrow. When price volatility is high, the
bands widen. And when it’s low, the bands
tighten. But of course with the markets,
anything is possible, including high vol
during consolidations. So if you see wide
bands moving sideways, it could mean
choppy trading conditions ahead.
Chaikin Volatility. The Chaikin volatility in-
dicator (CVI), developed by Marc Chaikin,
measures vol by looking at the difference
between the high and low for each period
or trading bar. When the range between
the high and low is wide, it can mean high-
er vol. When the range is narrow, it can
mean lower vol. This indicator calculates
the percentage change in a moving average
of a high versus a low price over a certain
time frame, usually 10 bars. The objective
is to look for sharp increases in vol. The
indicator fluctuates around zero (see Fig-
ure 3). As its value increases, it suggests
prices are changing fast, and within a wide
range. In a word, it suggests greater volatil-
ity. When CVI decreases, it suggests prices
are moving within a narrow range, or that
FIGURE 2: Bollinger Bands, vol, and price direction. The narrowing of the bands suggests volatility is low.
When they widen, it may mean price movement is volatile. How price moves with respect to the upper or lower
bands may indicate which direction prices are moving. Source: thinkors wim® from TD Ameritrade. For illustrative purposes only.
the market is perhaps less volatile. Unlike
the ATR, CVI doesn’t consider gaps in its
In Figure 3 you’ll see that the CVI creates
clear peaks and troughs. Notice how the
indicator ebbs and flows around the horizontal zero line. The movement is smooth,
and you can clearly identify if the indicator
is moving up or down.
Source: thinkorswim® from TD Ameritrade. For illustrative purposes only.
1. From the Charts tab, start with your basic chart.
2. Click the Studies button.
3. Move the cursor to Add Study.
4. You can either choose a study category or “All
Studies.” Indicators are listed alphabetically.
Next, select the study you want and it’ll appear
on your price chart.
HOW TO PULL UP AN INDICATOR