Volatility expansion - GetProfitable

Expansion is visible as rising atr, widening bollinger-bands and larger bar bodies. It is the second half of the contraction-expansion cycle that underpins bollinger-squeeze and volatility-contraction-pattern strategies.

Volatility clustering is one of the best-documented properties of financial returns: large moves follow large moves, quiet follows quiet. That makes expansion somewhat forecastable in magnitude, even though direction remains unforecastable.

The practical implication is about sizing, not signals. If your position size was calculated during contraction and the regime expands, your real risk has grown without you doing anything. Recalculating size as ATR rises is the discipline that keeps a volatile stretch from being an account-ending one.

See it drawn

Original diagrams for the ideas on this page. Illustrative, not real market data.

Working out a position size. Three numbers decide how big a trade is: the account, the share of it put at risk, and the distance from entry to stop. One percent of $25,000 is a $250 budget, and a $0.50 stop divides into that 500 times.

Bollinger bands: squeeze and expansion. The middle line is a 20-day average and the outer bands sit a set number of standard deviations away, so they measure how far price has recently been straying. When moves are small the bands pinch together; when moves grow they spread apart.