Volatility indicators measure how sharply prices swing, helping commodity traders gauge risk, spot breakouts, and time entries and exits.
The volatility technical indicator is helpful in seeing potential market reversals. This guide explains what it is and how to recognize trends with the help of example charts.
What Is Volatility?
The volatility indicator, based on the true range of price, is based on the following premise:
- Strong trends upward are marked by decreases in volatility.
- Strong trends downward show a general increase in volatility.
- Reversals in trend usually occur when volatility increases.
Effect of Strong Trends on Volatility
This chart of the 5,000 ounce silver futures contract illustrates the point that strong trends might have low volatility.
As the price in silver futures was increasing, the volatility was steadily decreasing. The change in trend was characterized by increased volatility.
Increased Volatility and Price Bottoms
When prices bottom, they are usually accompanied by increased volatility. An increase in the volatility indicator after a recent decline, could signal that the price is bottoming.
A trader might exit or reduce the size of short positions during this time of increased volatility at a bottom. Other indicators would be used to determine when a trader might enter a long position.
This chart of the S&P 500 E-mini futures contract shows an example of how bottoms can be marked by increases in volatility.
Where to Trade Using Technical Analysis
FAQ
How Is Volatility Calculated?
Volatility can be calculated by comparing current or expected returns against the stock or market’s mean or average. It typically represents a large positive or negative change.
It’s possible to report daily, weekly, monthly, or yearly volatility. This can be calculated using variance and standard deviation, with standard deviation being the square root of variance.
Further Reading on Volatility Indicators
These volatility tools complement Volatility Indicators: Mass Index, Standard Error Bands, and Ulcer Index.
Technical analysis is most widely used in CFD and forex trading. If you’re ready to apply these techniques, browse our vetted CFD brokers or forex brokers.
Update history
This page was revised 6 times between August 2020 and April 2026.
Added broker recommendation links and CFD/forex trading context to Further Reading section.
Removed broker reviews section and streamlined Further Reading to focus exclusively on volatility indicator resources.
Consolidated four related indicators into a single list item and clarified that broker reviews showcase available charting tools.
Refined section heading for clarity, expanded broker guidance to highlight charting tools, and consolidated related indicator links in Further Reading.
Restructured content with new table of contents and FAQ section, clarified technical explanations, standardized capitalization of "volatility indicator," and removed redundant comparison text to VIX indices.
Added three new sections (Bottom Reversals, How to Get Started Trading, Further Reading) with trading examples and broker resources, plus corrected spelling error "determing" to "determining".
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