The Volatility Ratio is a price range based indicator, that is designed to identify price ranges and breakouts from the price ranges. The Volatility Ratio calculates a version of the price range (known as the true range), and then identifies when the price has moved outside of this price range. The Volatility Ratio is usually displayed as a single line, on its own chart, separate from the price bars, and is the bottom section in the example chart (view full size chart).
- Description : The Volatility Ratio (VR) is a comparison of the current true range (TR) and a specific length of the previous true range (PR).
- Calculation :
TR = (HIGH - LOW | HIGH - CLOSE-1 | CLOSE-1 - LOW)
PR = (HIGH(H ... Hn | CLOSE-1) - LOW(L ... Ln) | CLOSE-1)
VR = TR / PR
The Volatility Ratio identifies when the price has moved outside of its recent price range, and is therefore used to identify breakouts. The exact level at which a breakout is signaled will vary depending upon the market being traded, but a popular level is 0.5 (which is when the current true range is twice the recent true range). The Volatility Ratio can be combined with other indicators, such as a volume indicator, that would confirm that the current volume is supporting the breakout.