Quantifying the Volatility of Stock Price Changes in the Indian Market Using the Moving Average Envelope and Bollinger Bands

Abstract

A trading system in any stock market is built on long-term, intermediate-term, and short-term indicators. Some ‘lagging’ indicators, such as the simple and exponential moving averages, can be used to determine the direction of a medium- to long-term trend. Some ‘leading’ oscillators, on the other hand, can tell a trader whether or not a trend is losing momentum. This paper examines how well moving average envelopes and Bollinger Bands measure stock price volatility, and how useful these technical analysis tools are for short-term horizons. The paper then attempts to evaluate the speed of these indicators in order to explain the sensitivity and response time of data collected from a secondary survey in the Indian capital market. The article concludes that moving average envelopes outperform Bollinger Bands in real trading settings, since technical trading rules are generally designed for short-term investments. Bollinger Bands can detect abrupt price fluctuations, however they are not more effective than moving average envelopes to measure profitability.