Volatility Ratio

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The Volatility Ratio indicator was developed by Jack Swagger to determine trading ranges and search for possible breakouts. The volatility coefficient is defined as the true range of the current day divided by the true range for a certain number of days (i.e. N periods). The following formula is used to calculate the volatility coefficient:

Volatility Coefficient (VR) = True Range for the current day/True Range for N days

The true Range is calculated using the following formula:

True Range of the current day = MAX (today’s maximum, yesterday’s close) – MIN (today’s minimum, yesterday’s close)

and

True Range for N days = MAX (maximum of day 1, maximum of day 2, …maximum of day N, closing of day 0) minus MIN (minimum of day 1, minimum of day 2, …minimum of day N, closing of day 0)

For example, the volatility coefficient of a stock with a true range of true range = 1.5 and true range for the last 10 days = 3.5 will be 1.5/3.5 = 0.428. This is a significant volatility coefficient. Usually, a volatility coefficient above 0.5 means the possibility of a reversal.

Using the volatility coefficient helps to identify the moments when the asset price has left its true range and possible reversal days can be expected in the near future.

The volatility coefficient indicates periods of time when the price has exceeded the recent price range to a degree sufficiently significant for a possible breakdown. More precise values for the breakdown are usually determined for specific assets and markets, but usually a value of 0.5 is used. This level represents the point at which the current true range is twice the previous true range. To confirm the breakdown signals generated by the volatility coefficient indicator, traders often use other technical indicators, such as the volume indicator, since trading volume, as a rule, increases sharply during market breakouts.