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This is an interesting debate.
The SD approach is attractive because the mean-squared deviation calculation
is at the base of much statistical analysis. But a limitation of the
standard deviation approaches is that security price changes are only
approximately normally distributed. Thus many of the SD-based approaches
(e.g. Kase) have to make adjustments to try to account for the differences,
and many options pricing models supplement Black-Scholes with other methods
(e.g. binomial). The ATR calculation starts off with more data (it takes
into account the full day-to-day range) and stays closer to it (by avoiding
the squaring process). It's not trying to force the data into a preconceived
probability distribution.
In the end, its hard to avoid the SD approach because it brings with it so
many detailed analytical applications. But for many uses, the ATR continues
to be an optimal tool.
On a computational note, if you want to compare, say, SD, ATR and regular
mean deviation, the default MS setting for ATR uses Wilder's smoothing,
which is exponential, so you'll want to write your own custom ATR if you
want to compare like to like.
Andrew
-----Original Message-----
From: equismetastock@xxxxxxxxxxxxxxx [mailto:equismetastock@xxxxxxxxxxxxxxx]
On Behalf Of Manuel Cabedo
Sent: Monday, May 16, 2005 5:14 AM
To: equismetastock@xxxxxxxxxxxxxxx
Subject: Re: [EquisMetaStock Group] ATR-based volatility
>From my own chart observations, I think that the ATR is probably the
best measure of volatility.
I don't think so, Jose. Volatility is a kind of dispersion, and the best
measure of dispersion is the standard deviation. It is a simple question of
statistics. With standard deviation you can do quantitative assertions about
the probability of breaking a channel, for instance, or being exited of an
operation by a stop.
Speaking of securities, I particularly like the standard deviation of daily
returns. The distribution of this quantity is not normal, of course, but you
can study it on a heuristics base.
The work of Bollinger is interesting (I am the translator of his book in
Spain) because he always justifies (or tries to.) his methods from a
statistical point of view. If someone likes his bands, then reading his book
is a must.
Once more, thank you, Jose. Your contributions to this forum are always
highly valuable (including the one about ATR...).
Kind regards.
Manuel
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