The Historical Volatility indicator shows you the extent that price deviates from a certain point in time. The Historical Volatility indicator increases and decreases based on typical price volatility. The main use of the indicator is for you to see how volatile a specific security or index is so you can better manage your positions.
How to use the Historical Volatility Indicator
Unlike other indicators based on volume, momentum, or trend-following, the Historical Volatility Indicator has no forecasting value. Instead, it’s a simple chart that shows volatility only, but the chart can still be useful when it is paired with other technical events.
Some practical use cases for the indicator include confirming reversals and breakouts. During this time, it would be expected that there would be significant volatility as prices change course. If you don’t see volatility increasing during these times, it may foreshadow a false signal or whipsaw.
Some other uses of the Historical Volatility Indicator are by comparing two financial instruments against each other. By using the tool, you can get a visual representation of which carries the most amount of risk and potential for downside. These instruments can include things such as cryptocurrencies, currency pairs, or even whole indexes. Volatility generally implies a greater amount of risk for the trader, as more volatility implies a choppier price action.
The final way you can use the indicator is by using it to confirm if price is a ranging or trending market. Choppy sideways trading will naturally accrue a greater amount of volatility than during a strong upwards or downward trend.
In short, the Historical Volatility Indicator is another tool that you can use for checking a security’s overall health and to time your entry and exit points.