Volatility Quality Index [VQI]

The Volatility Quality Index [VQI] indicator aims to distinguish between "good" and "bad" volatility to help traders identify high-quality market opportunities and filter out noise.

Usage

The Usage section focuses on interpreting the three primary lines generated by the script:

• VQI Sum (Red Line): Represents the cumulative sum of the Volatility Quality calculation.
• Fast SMA (Green Line): A 9-period Simple Moving Average of the VQI Sum, used to identify short-term momentum shifts.
• Slow SMA (Blue Line): A 200-period Simple Moving Average of the VQI Sum, acting as a long-term trend baseline.

Traders typically look for directional changes in the VQI Sum relative to its moving averages. A common strategy involves identifying bullish opportunities when the VQI Sum and its Fast SMA are increasing or crossing above the Slow SMA, while bearish opportunities are sought when the VQI values are declining. It is often recommended to use these signals as confirmation alongside other technical analysis tools.

Details

Developed by Thomas Stridsman, the Volatility Quality Index (VQI) is designed to evaluate price action by looking at the relationship between true range, open, high, low, and close prices. By calculating the ratio of price change to the trading range, the VQI attempts to quantify the efficiency of price movement.

The implementation calculates a periodic VQI value which is then accumulated into a running total (VQI Sum). This cumulative approach allows for the application of standard moving averages to the volatility data, smoothing out erratic movements and providing a clearer picture of whether the current market volatility is contributing to a sustainable trend or merely creating market noise.

Settings

• Fast EMA Length: Sets the period for the faster moving average applied to the VQI Sum (default is 9).
• Slow EMA Length: Sets the period for the slower moving average applied to the VQI Sum (default is 200).

FAQ

How do I interpret a crossover between the Fast and Slow SMA?

A crossover of the Fast SMA (Green) above the Slow SMA (Blue) suggests a potential increase in "quality" bullish volatility, while a cross under suggests increasing bearish volatility.

Can this indicator be used on all timeframes?

Yes, the Volatility Quality Index can be applied to any timeframe, though the default SMA lengths (9 and 200) are commonly used to capture short-term and long-term trend dynamics respectively.

How can I access the Volatility Quality Index [VQI]?

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