Volatility Ratio

This ratio is derived from the Volatility Ratio introduced by Jack Schwager in Technical Analysis to identify wide-ranging days.

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Designed to highlight breakouts from a trading range, this VR compared to true range for the indicator period.

Example

Microsoft Corporation with 7-day Volatility Ratio (VR).

Breakouts are signaled by a Volatility Ratio greater than 0.5.

1. Volatility Ratio surges on a breakaway gap from a ranging market. Note that the difference between High and Low is relatively small but the gap is included in the range.
2. Another surge in VR signals the start of a strong up-trend.
3. The trend loses impetus and a sharp rise in the VR warns of a strong correction (to below the $100 level).

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Setup

The default period for Volatility Ratio is 14 days. To alter the default settings - Edit Indicator Settings.

See Indicator Panel for directions on how to set up the indicator.

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Formula

Volatility Ratio = True Range / True Range for the past n periods

True Range is the greater of:

• The day's High minus the Low;
• Today's High minus yesterday's Close; and
• Yesterday's Close minus today's Low.

True Range [for the past n periods] is calculated in a similar manner:

• True High = maximum of the highest High in n-periods and the previous (n-1) close
• True Low = minimum of the lowest Low in n-periods and the previous (n-1) close
• True Range = True High - True Low