Volatility Contraction Score

The Volatility Contraction Score indicator quantifies volatility compression and supply-demand equilibrium on a numerical scale to identify periods of potential market breakouts. By analyzing price range contraction, volume dry-up, and structural consistency, the tool assigns a score from 0 to 100 that reflects the intensity of energy being stored within a price structure.

Usage

The Usage section describes how the script can be used to identify high-probability setups based on volatility compression levels. Users can monitor the histogram colors and numerical values to gauge market tightness.

• Identifying Setups: When the score rises above 80 (Green), it indicates "Critical Tightness," suggesting that energy accumulation is at an extreme. Scores between 60 and 80 (Blue) represent the "Setup Stage," where compression is still developing.
• Bullish Breakouts: A high score (above 80) paired with price consolidation near resistance suggests a potential upside continuation. Users look for a decisive break above the range boundary with expanding volume.
• Risk Management: If the score is elevated but price breaks below major support or begins forming lower lows, it indicates a failure in the supply-demand equilibrium, suggesting a potential breakdown or failed base.

Details

The script is inspired by technical concepts like the Volatility Contraction Pattern (VCP) and uses a weighted composite of several factors to determine the final score:

• Price Compression: Compares short-term ATR and Standard Deviation against longer-term averages to measure how tightly the asset is trading.
• Volume Contraction: Measures recent volume against historical averages to detect supply exhaustion.
• Efficiency Filter: Penalizes strong directional moves to ensure the score reflects genuine sideways compression rather than momentum expansion.
• Structure & Consistency: Checks if recent lows hold above prior structural lows and awards a "Consistency Bonus" for sustained periods of tightness, prioritizing mature bases over short-lived fluctuations.

Settings

VCP Logic Settings

• Short Term: Sets the period for short-term volatility and price measurement.
• Long Term: Sets the period for the historical baseline comparison.
• Volume Average (Logic): Determines the lookback for the volume exhaustion calculation.

Trend Filter

• Trend Penalty Strength: Controls how much directional momentum reduces the compression score.

Structure Settings

• Structure Lookback: Defines the window for identifying previous structural lows.
• Penalty for Lower Low: Sets the multiplier applied to the score if the higher-low structure is broken.

Consistency Weight

• Max Consistency Points: Defines the maximum bonus points awarded for sustained compression over time.

Screener Data

• Avg Volume Length: Period used for the average volume output in the Data Window.
• RS Benchmark: The symbol used as a comparison for the Relative Strength calculation (e.g., SPY).
• RS Period: The lookback period for the Relative Strength percentile rank.
• ADR Period: The lookback period used for the Average Daily Range percentage.

FAQ

How do I interpret the different colors in the histogram? Green (80+) represents critical tightness, Blue (60-80) represents the setup stage, and Gray (below 60) indicates a loose or expansion phase where compression is lacking.

Does a high score predict which direction the price will break? No, the indicator measures energy storage and volatility contraction; it does not determine direction. Users should use price action and volume confirmation to determine the breakout direction.

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