LS Volatility Index

The LS Volatility Index indicator measures price volatility in relation to a moving average, helping traders identify abnormal price extensions and potential market reversals. By normalizing the distance between price and its average against historical volatility, the tool provides a clear 0-100 scale to gauge whether the market is overextended or trading within acceptable trend parameters.

Usage

The indicator can be applied to various trading styles including mean reversion and trend following:

• Mean Reversion: When the index reaches extreme high values (near 100), it indicates the price is significantly "stretched" from its average. Traders often look for these peaks to anticipate a return to the mean.
• Trend Following: During healthy trends, the index often stays within an "acceptable" mid-range. Maintaining a consistent level above zero without hitting extreme peaks can suggest a sustainable trend.
• Identifying Crashes: Sharp spikes in the index often coincide with market crashes or rapid parabolic moves, signaling high-risk zones.
• Divergences: By comparing price peaks with index peaks, traders can identify momentum exhaustion through regular or hidden divergences.

Details

The LS Volatility Index is based on concepts described by Brazilian traders Alexandre Wolwacz (Stormer), Fabrício Lorenz, and Fábio Figueiredo (Vlad).

The calculation process follows three main steps:

1. Percentage Distance: It measures how far the current price is from a selected moving average in percentage terms.
2. Historical Volatility: It calculates the historical average volatility over a specified lookback period.
3. Ratio & Normalization: The final value is derived from the ratio of the price distance to historical volatility. This result is then normalized using a feature scaler to fit a 0-100 range, where 0 represents the price sitting exactly on the average and 100 represents an extreme historical deviation.

Settings

Moving Average of Price

• Source: The price data used for the calculation (e.g., Close, HL2).
• Type: Choose between SMA, EMA, HMA, ALMA, Median, or VWAP for the baseline average.
• Length: The lookback period for the primary price moving average.

LS Volatility Index

• Length for Historical Volatility: Determines the lookback window used to calculate the volatility baseline.
• Normalization Length: The period used to scale the indicator between 0 and 100; higher values reduce noise but may lag.
• Smooth indicator: Enables an additional moving average on the index itself to filter out minor fluctuations.
• Show moving average: Toggles a secondary signal line (moving average) on the indicator plot.

FAQ

How do I use the LS Volatility Index for mean reversion?

You look for instances where the indicator hits the upper threshold (near 100), suggesting the price is overextended and likely to revert to its moving average.

Can I change the baseline average type?

Yes, the settings allow you to choose from various average types including EMA, SMA, and VWAP to suit your specific trading strategy.

How can I access LS Volatility Index?

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