Volatility Ratio
This ratio is derived from the Volatility Ratio introduced by Jack Schwager in Technical Analysis to identify wide-ranging days.
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.
- 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.
- Another surge in VR signals the start of a strong up-trend.
- The trend loses impetus and a sharp rise in the VR warns of a strong correction (to below the $100 level).
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
