The difference between Bollinger Bands and envelopes is envelopes are plotted at a fixed percentage above and below a moving average, whereas Bollinger Bands are plotted at standard deviation levels above and below a moving average. Since standard deviation is a measure of volatility, the bands are self-adjusting: widening during volatile markets and contracting during calmer periods.
Bollinger Bands were created by John Bollinger.Bollinger Bands are usually displayed on top of security prices, but they can be displayed on an indicator. These comments refer to bands displayed on prices. As with moving average envelopes, the basic interpretation of Bollinger Bands is that prices tend to stay within the upper- and lower-band. The distinctive characteristic of Bollinger Bands is that the spacing between the bands varies based on the volatility of the prices.
During periods of extreme price changes (i.e., high volatility), the bands widen to become more forgiving. During periods of stagnant pricing (i.e., low volatility), the bands narrow to contain prices. Mr. Bollinger notes the following characteristics of Bollinger Bands:
Average True Range
Wilder has found that high ATR values often occur at market bottoms following a "panic" sell-off. Low Average True Range values are often found during extended sideways periods, such as those found at tops and after consolidation periods.
The Average True Range can be interpreted using the same techniques that are used with the other volatility indicators. Refer to the discussion on Standard Deviation for additional information on volatility interpretation.
Chaikin's Volatility indicator
There are two ways to interpret this measure of volatility.
One method assumes that market tops are generally accompanied by increased volatility (as investors get nervous and indecisive) and that the latter stages of a market bottom are generally accompanied by decreased volatility (as investors get bored).
Another method (Mr. Chaikin's) assumes that an increase in the Volatility indicator over a relatively short time period indicates that a bottom is near (e.g., a panic sell-off) and that a decrease in volatility over a longer time period indicates an approaching top (e.g., a mature bull market).
As with almost all experienced investors, Mr. Chaikin recommends that you do not rely on any one indicator. He suggests using a moving average penetration or trading band system to confirm this (or any) indicator.
Volatility Quality - on chart - indicator for MetaTrader 5
Volatility Quality indicator made "on-chart" by bars, candles and lines.