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Technical indicators that can help traders navigate volatility

Volatility, in simplest terms, defines the change in stock price over daily average change.
Trading in a volatile stock is difficult as the movement is often sharp and uncertain. Volatility, in simplest terms, defines the change in stock price over daily average change. This means that if a stock is swinging in the 5 per cent range and suddenly begins to trade over 5 per cent -- the average swing -- then it looks to have entered a volatile phase.

These uncertain moves are highly attractive, but trading in one is, in fact, risky. Volatility may trigger stop loss and show certain unexpected moves. Such a scenario disrupts trading morale, leaving traders anxious.

To avoid risky trades and minimise losses, here are a few technical indicators that can help amplify the real picture.

Keltner Channel

Keltner channel is a moving average band indicator comprising three bands -- upper, middle, and lower bands -- that assist in identifying and protecting from volatile price moves with the use of average true range. This indicator is very useful in a strong trend, either upward or downward. As the stock starts to show the weakness at the upper band, one can view this as an opportunity to enter a trade around the middle band. While doing so, the stop loss can be considered as the difference of middle and lower band. As said earlier, in a trending market, the stock is expected to rebound on the back of follow-up buying.

The same philosophy can be applied when the stock is in a downtrend. The Keltner channel encourages one to enter a trade within a specific range of volatility. This can diminish the greater volatility as one always waits for better levels of middle band. Normally, the stock price moves within the band, which primarily defines the expected volatility. When the stock breaches the Keltner channel, it may lead to extreme rally with wild swings wherein sentiments may change unexpectedly. CLICK HERE TO VIEW THE CHART

Stochastic Oscillator

The Stochastic indicator is a momentum oscillator which identifies the change in price as compared to its previous range of prices over a certain period of time. Basically, this indicator is plotted on a 0 to 100 scale, with over 80 value being defined as 'overbought' and below 30 as 'oversold'. Although, there can be exceptions where a stock shows strong momentum over 80 value. This does not mean the volatility is low, it can even show stronger volatile moves in the price.

The strategy is to look for long positions as the stock slips below the oversold region, since this implies that a reversal is indeed the future expectation. One can wait till the price climbs above 30 value for a confirmed entry. Similarly, when the price touches the roof of 80 value, the range seems to have reached a far end and one can expect a fall when the indicator slips below 80. CLICK HERE FOR THE CHART

And, although these rules may not always be true; however, one can get a fair idea about the volatility and maximum swings that are supposed to occur in any given fair trade. Volatility does provide opportunities, yet the risk involved in the trade is uncertain. In order to manage a volatile stock, one needs to have a strong hold on certain technical parameters that one has learnt and experimented with over the years.

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