How to Read and Play Volatility Signals

The markets are getting more volatile these days, or at least that's what the talking heads are telling us.

Volatility readings can help traders understand market cycles and improve price prediction. I use three technical tools to gauge current volatility and predict its expansion or contraction. These measurements often trigger immediate opportunities, but they can also yield data that don't require an instant response.

Markets alternate continuously between bursts of intense activity and periods of relative calm. We watch this pulse as prices step up or down to a new level, test a new trading range and then break toward another level. As one phase nears its end, the chart often prints a small-scale pattern that signals an impending rally or selloff. ...