Volatility Ratio

Volatility measures how much a stock price (or any other asset price) is likely to move over a period of time.

Think of it in terms of emotion. You have a volatile friend. At the beginning of the night, they can be smiling and laughing and generally having a good time. An hour later, they're ugly-crying in a bathroom stall. Very volatile.

Some stock prices are like that as well: $20 today...$8 tomorrow...rally to $35 next week. Very volatile. The volatility ratio represents a technical indicator meant to compare near-term price movements with its longer-term volatility.

To calculate the measure, first look at a stock's price range for the day. Subtract its low price from its high price. That equation gives you today's range, known as the TTR (today's true range). Then figure out the ratio of the TTR with the longer-term volatility. This second part gets measured by the average true range for whatever period you're looking at (50 days, 200 days, etc.). The ratio then looks at today's range versus the average range over a period of time. How much more (or less) volatile is the stock today compared to its recent average? That question represents the heart of the volatility ratio.

The measure is meant to clue investors into possible changes in a stock's behavior, predicting breakouts or other changes in its chart pattern.