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Volatility Ratio

Definition of Volatility Ratio

  • The Volatility Ratio (VR) quantifies market volatility by comparing the current day's true range to the average true range over a specified number of previous periods.
  • Formula: VR = Today's True Range / True Range over N periods
  • Today's True Range is calculated as: MAX(today's high, yesterday's close) - MIN(today's low, yesterday's close).
  • True Range over N periods is derived from the highest and lowest prices over those past N days, plus the previous day's close.

    • Interpreting the Volatility Ratio

  • A VR value above 0.5 may indicate potential breakout points, suggesting prices are significantly moving out of their normal range.
  • A lower ratio can indicate consolidating prices and potential future volatility spikes 🤔.
  • The standard practice is to analyze the ratio in conjunction with other indicators, such as trading volume, for confirmation of breakout signals.

    • Application in Trading Strategies

  • The Volatility Ratio assists traders in identifying advantageous entry points, especially during periods of unexpected price movements.
  • It is commonly used alongside the Average True Range (ATR) indicator settings, often with a standard period of 14.
  • Commonly adjusted parameters include the minimum ratio for the signal (recommended at 0.5) and whether to enable volume filters for added confirmation 🚀.

    • Example Calculation

  • For instance, if a stock has a true range of 1.5 and an average true range over the last 10 days of 3.5, its volatility ratio would be calculated as: 1.5 / 3.5 = 0.428.
  • This would suggest that the volatility is approaching significant levels, which may alert traders to potential entry points.
  • Chart signals can highlight timeframes when the ratio crosses certain thresholds, making it easier to spot trading opportunities.

    • Common Tools and Indicators

  • Trading bots like EASY Trendopedia and EASY Breakopedia utilize volatility assessments to develop trading strategies based on market behavior.
  • Indicators tailored for MetaTrader, such as the Volatility Ratio indicator, are designed to simplify the analysis process and provide real-time alerts.
  • These tools help traders react promptly to changing market conditions and execute trades more effectively 🤑.

    • Welcome to the captivating yet perilous world of the Volatility Ratio! An indicator that promises clarity but may leave you more confused than a cat in a dog park. Sure, you can download it for free—because who doesn’t love a freebie, right? But remember, the trader's path is ...

    Release Date: 03/10/2017

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