Realized Volatility IIR Filters with Bands

The Realized Volatility IIR Filters with Bands indicator is a trend-following tool that utilizes volatility estimation algorithms as coefficients for Infinite Impulse Response (IIR) filtering to identify market direction and volatility expansion.

Usage

The tool can be used to identify trend direction and potential reversal zones through the interaction of price with the IIR filter and its associated deviation bands.

• Trend Identification: When the price remains above the central IIR filter line, the market is generally considered to be in an uptrend, while price below the line suggests a downtrend.
• Volatility Bands: The script plots deviation bands based on the same IIR coefficients. These bands act as dynamic support and resistance levels. A breakout above the upper red bands suggests strong bullish momentum, while a break below the lower blue bands suggests strong bearish momentum.
• Model Selection: Users can switch between different volatility models to change the "speed" and "reactivity" of the filter. For example, using the Ulcer Index (Fast) will result in a more reactive filter compared to the Ulcer Index (Slow).

Details

This script is built on the concept of using realized volatility as a weighting factor for an IIR filter. Instead of a fixed smoothing period, the filter's coefficients are dynamically adjusted based on market volatility.

The indicator offers three primary estimation models:

• Elastic Volume Weighted Volatility (EVWV): A modified version of the Volume Weighted Volatility measure, using an Elastic Volume Weighted Moving Average for faster calculation.
• Garman & Klass / Yang-Zhang Extension: A range-based estimator (OHLC) that accounts for opening gaps, providing a robust measure of bar-to-bar volatility.
• Peter Martin's Ulcer Index (Modified): This model uses a convex risk metric focusing on Drawdowns and Draw-Ups. The "Fast" version tracks maximum volatility variations, while the "Slow" version filters for minimum volatility levels.

Settings

• Volatility Model: Selects the specific algorithm (EVWMA, GKYZ, or Ulcer Index variants) used to calculate the IIR filter coefficients.
• Volatility Sensitivity: Determines the number of bars used for the compound calculation of the volatility estimate. Lower values make the filter more "non-parametric" and reactive.
• UPPER Dev factor: A multiplier that adjusts the width of the upper deviation bands.
• LOWER Dev factor: A multiplier that adjusts the width of the lower deviation bands.

FAQ

How do I use the different volatility models?

You can select the model in the settings menu; choose EVWMA for volume-sensitive filtering, GKYZ for range-based accuracy, or Ulcer Index variants for risk-adjusted trend following.

What do the bands represent?

The bands are IIR deviation filters that expand and contract based on the realized volatility of the asset, providing objective levels for overextended price action.

How can I access this tool?

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