Volatility tools: ATR, Bollinger Bands®, Keltner Channels and squeezes

🎯 In 30 seconds: Volatility tools measure how far price tends to move, not which way. ATR averages the full daily range including gaps. Bollinger Bands® set lines a number of standard deviations around an average, and %B and BandWidth turn them into readings you can compare. Keltner Channels set lines a multiple of ATR around an average. A squeeze is a stretch of unusually low volatility, often defined as the Bollinger Bands slipping inside the Keltner Channel. Quiet markets tend to get louder, but the tools cannot say in which direction.

Two ways to measure movement

There are two common yardsticks. Average True Range (ATR) measures the size of each bar, including any gap from the prior close, and averages it. Standard deviation measures how spread out the closes are around their average.

They answer slightly different questions. A stock that swings $3 within each day but closes at the same price every day has a large ATR and a tiny standard deviation. A stock that drifts steadily upward in small bars has a small ATR and a growing standard deviation, because each close sits farther from the average. The chapter on volatility indicators works through both calculations and ATR position sizing. This chapter builds on them.

ATR in practice

J. Welles Wilder Jr. introduced ATR in 1978 with a 14-bar setting. Three practical uses:

ATR as a percent. ATR is in dollars, so divide by price to compare stocks. A $200 stock with a $4 ATR moves about 2% a day. A $15 stock with a $0.60 ATR moves about 4% a day, so it is the jumpier of the two.
Normal versus unusual. A bar that spans 3 ATRs is unusual for that stock. A bar of half an ATR is a quiet day.
ATR-based exits. The chandelier exit, credited to Chuck LeBeau, hangs a stop a fixed number of ATRs below the highest high since entry. A common setting is 3 × ATR(22). If the highest high is $80 and ATR is $2, the stop sits at $74. As the high rises, the stop rises with it. It never moves down.

Bollinger Bands® beyond the basics

John Bollinger’s bands use a 20-bar simple average with lines 2 standard deviations above and below. His book suggests trimming the multiplier slightly for shorter averages and raising it slightly for longer ones, so the bands contain a similar share of price action. Two readings he introduced make the bands easier to use.

%B tells you where the close sits relative to the bands. %B = (close minus lower band) / (upper band minus lower band). Example: the bands are at $110 and $90 and the close is $105. %B = 15 / 20 = 0.75.

Hypothetical. %B turns the bands into a ruler: 0 at the lower band, 1 at the upper band, 0.5 at the middle. Closes outside the bands read above 1 or below 0.

%B is useful because it puts every stock on the same scale. It also makes rules easy to write. For example, “in an uptrend, watch for %B to dip below 0.2” is something you can test, while “price near the lower band” is not.

BandWidth measures how wide the bands are relative to the middle. BandWidth = (upper band minus lower band) / middle band. With bands at $110 and $90 around $100, BandWidth is 0.20. Readers compare today’s value with the stock’s own range over the past six months or so. A reading near the bottom of that range marks a quiet market.

Keltner Channels

Chester Keltner described an early channel in 1960 using an average of typical prices and the average daily range. The version most charting tools show today uses a 20-bar EMA in the middle with lines 2 × ATR above and below. Because ATR changes slowly, Keltner Channels are smoother than Bollinger Bands and do not snap shut when closes bunch together.

Price riding along the upper Keltner line suggests a steady uptrend. A close far outside the channel marks a bar that was unusually large for the stock’s recent behavior.

Defining a squeeze

A squeeze is a period of unusually low volatility. Two common definitions:

BandWidth near a six-month low. Simple and uses the Bollinger Bands alone.
Bollinger Bands inside the Keltner Channel. The two tools react at different speeds, so the faster one fitting inside the slower one marks an unusual lull.

Worked example: a hypothetical stock has a 20-bar average of $50, a standard deviation of $1.00 and an ATR of $1.50. The Bollinger Bands are at $48 and $52. The Keltner Channel (using the same $50 middle for simplicity) is at $47 and $53. The Bollinger Bands sit inside the channel, so this counts as a squeeze. If the standard deviation later rises to $2.00, the bands move out to $46 and $54 and the squeeze is over.

Hypothetical daily chart. Bollinger Bands® (20, 2) react to standard deviation and shrink fast when closes bunch together. The Keltner Channel (20-bar EMA plus or minus 2 ATR) shrinks more slowly. When the Bollinger Bands slip inside it, the market is unusually quiet. Here the breakout went up; it could have gone the other way.

Tool	Built from	Common default	Best used for
ATR	True range, smoothed	14	Stop distance and position size
Bollinger Bands®	Standard deviation of closes	20, 2	Seeing stretched closes and squeezes
%B	Close relative to the bands	Same as the bands	Comparable, testable rules
BandWidth	Band width relative to the middle	Same as the bands	Spotting unusually quiet periods
Keltner Channel	EMA plus or minus ATR	20 EMA, 2 × ATR	Smoother trend envelope
Chandelier exit	Highest high minus ATR	22, 3	Trailing stops

Where they mislead

No direction. A squeeze ends with a move, but the tools do not say which way. Many traders wait for price to break a range edge and use the squeeze only as a reason to pay attention. The gaps and breakouts chapter covers how to judge the break itself.
Squeezes can last. A quiet market can stay quiet for weeks, and an early entry can sit idle or get shaken out.
The bands are not probabilities. Stock returns have more extreme days than a bell curve predicts, so closes outside 2 standard deviations happen more often than textbook statistics suggest.
One gap distorts ATR. A single earnings gap can lift ATR for weeks, which widens any stop or channel built from it.

Watch out

A close above the upper band is often read as “overbought”, but in a strong trend price can ride the upper band for weeks. A touch of a band is a description of a large move, not an instruction. And remember that a stop placed a few ATRs away limits risk only if it fills near its price. After an overnight gap the fill can be far worse.

Try it on the chart

In the Technical Analysis tool, add Bollinger Bands® and Keltner from “＋ Indicators” on a daily chart, then add band width and ATR % in the lower panes. Find every stretch where the Bollinger Bands sat inside the Keltner lines over the last two years. For each one, note which way price broke and how far it went in ATRs. Then try the Chandelier exit on the same chart and see where it would have trailed out of the last trend.

Check yourself

The bands are at $66 and $54 and the close is $57. What is %B? Answer: (57 minus 54) / 12 = 0.25.
A $40 stock has an ATR of $1.20 and a $120 stock has an ATR of $2.40. Which moves more relative to its price? Answer: The $40 stock, at 3% a day, against 2% for the $120 stock.
The highest high since entry is $95 and ATR(22) is $2.50. Where is a 3 × ATR chandelier exit? Answer: $95 minus $7.50 = $87.50.
The Bollinger Bands have moved inside the Keltner Channel. Which way will price break? Answer: The squeeze does not say. It marks unusually low volatility; direction has to come from price itself.

Sources

John Bollinger, Bollinger on Bollinger Bands (2001), %B, BandWidth and parameter choices
J. Welles Wilder Jr., New Concepts in Technical Trading Systems (1978), true range and ATR
Perry J. Kaufman, Trading Systems and Methods, volatility measures, channels and stops
Moneydesks Technical Analysis tool: Indicator guide entries for Bollinger Bands®, Keltner, ATR, ATR %, %B, band width and Chandelier exit
Bollinger Bands® is a registered trademark of John Bollinger. The name is used only to describe the indicator.