Volatility Skew

The Volatility Skew indicator measures the historical volatility of a security by comparing the intensity of upward moves against downward moves to identify directional bias in price fluctuations.

Usage

The Volatility Skew tool is primarily used to identify whether price action is experiencing more volatility during bullish or bearish phases. Traders can interpret the output based on its relationship to the baseline of 1.0:

• Values Above 1.0: Indicate that volatility is skewed to the upside, meaning upward price movements are more aggressive or volatile than downward ones.
• Values Below 1.0: Indicate that volatility is skewed to the downside, suggesting that downward price movements are more volatile.

This can be used to confirm the strength of a trend or to identify potential shifts in market sentiment where one direction begins to exhibit more "stress" or range than the other.

Details

The script calculates an exponential moving average (alpha-based) of the True Range, specifically segmenting it based on whether the current close is higher or lower than the previous close. It maintains two separate rolling values:

1. Deviation Max: An accumulation of volatility during "up" bars.
2. Deviation Min: An accumulation of volatility during "down" bars.

The final output is the ratio of these two values. Unlike the CBOE SKEW Index, which looks at implied volatility across different option strikes (tail risk), this indicator focuses purely on realized historical volatility derived from the price action of the underlying asset.

Settings

• Skew Length: Determines the lookback period used for the alpha calculation. A shorter length makes the indicator more reactive to recent price spikes, while a longer length provides a smoother, more trend-oriented ratio.

FAQ

How do I interpret a reading of exactly 1.0?

A reading of 1.0 suggests that upside and downside volatility are perfectly balanced over the selected lookback period.

Is this a leading or lagging indicator?

As it is based on historical True Range and exponential averages, it is a lagging indicator that describes the realized volatility environment rather than predicting future price targets.

How can I access Volatility Skew?

You can get access on the LuxAlgo Library for charting platforms like TradingView, MetaTrader (MT4/MT5), and NinjaTrader for free.