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4. Volatility & Moving Averages
Use SMAs, EMAs, Bollinger Bands, and ATR to smooth out noise and understand market chop.
Smoothing the Noise
Price action can be chaotic. Moving averages smooth out the data to reveal the underlying trend.
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Fig: SPY Bollinger Band squeeze followed by a directional break (watch the bands widen as volatility expands).
- SMA (Simple Moving Average): The average price over X days. Evaluates all days equally.
- EMA (Exponential Moving Average): Gives more weight to recent prices, making it react faster to changes than the SMA.
- Bollinger Bands: A middle SMA line surrounded by an upper and lower band (usually 2 standard deviations away). Prices touching the lower band may indicate an oversold bounce opportunity.
- ATR (Average True Range): Measures pure volatility. It does not tell you direction, just how wildly the price is swinging. High ATR = wild swings (higher risk).