Our Daily Volatility Ranges and Levels, often referred to as Expected Moves, serve as an effective guide for assessing price action and making informed intraday trading decisions. Below is a quick overview to help you understand how to interpret these Volatility Ranges and levels.
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What Are Volatility Ranges?
Our volatility ranges, or 'expected moves,' represent the amount a stock, ETF, or futures product is expected to rise or fall from the closing price, based on its current levels of implied and historical volatility.
These levels reflect one- and two-standard deviation ranges for a stock’s future price, indicating the range in which the asset is likely to close within for the day, according to market expectations.
This concept is derived from options pricing and represents the market's collective forecast of the stock's volatility. These ranges are valuable for any investor or trader looking to anticipate potential price movements.
The standard deviation range is often referred to as the "68-95-99.7 rule," which states that:
68% of outcomes fall within one standard deviation of the mean.
95% of outcomes fall within two standard deviations of the mean.
99.7% of outcomes fall within three standard deviations of the mean.
One Sigma Up & One Sigma Down
A one-standard deviation range encompasses 68% of the expected outcomes, meaning the price is expected to close within this range approximately 68% of the time.
Two Sigma Up & Two Sigma Down
A two-standard deviation range encompasses 95% of the expected outcomes, meaning the price is expected to close within this range approximately 95% of the time.
Can Price Go/Close Outside of the 2 Sigma Range?
While we know that in trading, 'anything is possible,' when price moves beyond the 2-sigma level, we can consider the move 'overextended' and outside the expected volatility parameters. If price closes beyond the 2-sigma range, it's an indication of an above-average volatile day, falling within the 5% of expected outcomes.
How Do I Use the Volatility Ranges and Levels?
Some traders in our community use the ranges as 'gauges,' while others treat them as support and resistance levels—or even both!
As a "Gauge"
When using the levels as gauges, we can think of them as 'guardrails' that indicate where we expect the price to stay on a typical day. For example, if the price moves above and holds beyond the 2-sigma level, we should start considering it an above-average volatile day, signaling the potential for a trend move to the upside. In other words, sigma levels provide reference points to help us analyze the type of price action and the kind of day we're experiencing—whether it's a trend day or a range day.
As Support and Resistance Levels
Traders in our community also use the volatility ranges as support and resistance levels.
When the price moves up from below, the one- and two-sigma levels often act as resistance. Conversely, when the price moves down from above, these sigma levels often serve as support.
Similarly, when the price declines from above, the one- and two-sigma down levels typically act as support. When the price rises from below, these levels can act as resistance.