Bollinger Bands and ATR: measuring volatility

⚠️ Risk warning: CFDs and leveraged forex are complex instruments with a high risk of losing money rapidly. Most retail accounts lose money. This content is education only, not investment advice or a recommendation.

Volatility is how much price moves. It changes all the time: quiet periods are followed by active ones and back again. Two tools measure it.

Bollinger Bands

The standard Bollinger Bands (20, 2) are an SMA 20 with bands two standard deviations above and below it. When price is calm, the bands narrow (a squeeze); when it moves strongly, they widen (an expansion).

A squeeze tells you volatility is low. It does not tell you which way the expansion will go.
In a strong trend, price can "walk the band", closing near the upper or lower band for many bars. A touch of the band is not a reversal signal.
In a range, the bands can help frame the edges, together with support and resistance.

ATR

The Average True Range (ATR 14) is the average size of the last 14 bars, including gaps. It is in price units: dollars for gold, pips for EUR/USD, riyals for 2222. It has no direction.

Stops: a stop closer than the normal bar size is likely to be hit by noise. Many traders set stops beyond a level plus a fraction or a multiple of ATR.
Position size: when ATR doubles, the same stop in ATR terms is twice as far in price, so the position size must shrink to keep the same risk.
Expectations: ATR tells you roughly how far price has typically moved per bar recently. It is not a limit.

Worked example: gold (XAU/USD), H4. The figure uses drawn prices. After a rally, gold goes quiet. The bands contract until they are less than $10 apart, and ATR (14) falls to about 3.4. Then price breaks upwards, the bands widen sharply, and ATR rises to about 6.2. A stop of 1.5 × ATR would have been about $5 during the squeeze and about $9 afterwards: the same rule, but nearly double the distance, so the position size must be smaller for the same risk.

Common misuse

Selling every upper-band touch and buying every lower-band touch in a trending market.
Assuming a squeeze must break in the direction of the last trend.
Keeping a fixed stop in pips or dollars while volatility doubles.

This lesson is educational. Volatility measures describe the past; they do not predict direction.

🛠️ Practice task

Use a real chart. This is for practice, not for placing a trade.

Open gold (XAU/USD) on H4 and add Bollinger Bands (20, 2) and ATR (14). The Invvex gold page shows the current price.
Find the last clear squeeze. Write down the ATR value at its narrowest point and after the move that followed.
Note which way the squeeze broke, and whether the first break held or reversed.
Pick a support level and calculate a stop of 1.5 × the current ATR beyond it. Use the position-sizing lesson to work out the size for 1% risk on a demo account.
Repeat on EUR/USD H4 and compare ATR in pips across a quiet week and a news week.

🎯 Mark this chart

Study the drawing, pick the letter, then check. This exercise does not count toward your progress; the quiz below does.

EUR/USD H4: find the Bollinger squeeze Illustrative chart: drawn data, not real prices.