Volatility Ratio

The Volatility Ratio indicator is derived from the Schwager Volatility Ratio introduced by Jack Schwager to identify days of large price variations.

Calculation Method

Volatility Ratio = "True Range of the last day" / "True Range over the period"

where:

• "True Range of the last day" is equal to the largest of the following three variations:
  • High of the last day - low of the last day
  • High of the last day - closing price of the previous day
  • Closing price of the previous day - low of the last day
• "True Range over the period" is equal to "True High" - "True Low", with:
  • "True High": Maximum of the high during the period or the closing price of the previous day of the first day of the period
  • "True Low": Minimum of the low during the period or the closing price of the previous day of the first day of the period

Example

Interpretation

Trend reversals generally correspond to a Volatility Ratio becoming greater than 0.5.