Volatility Cycle Indicator

The Volatility Cycle Indicator tool measures market volatility and cycles by normalizing standard deviation through the Average True Range (ATR) to provide a non-directional perspective on market expansion and contraction. It identifies market regimes ranging from low-volatility consolidation to extreme expansion, helping traders determine whether to apply trend-following or mean-reversion strategies.

Usage

The Volatility Cycle Indicator is used to identify the current volatility regime and potential breakout points. The main line represents the Volatility Cycle Index (VCI).

• Volatility Squeeze: When Bollinger Bands contract within Keltner Channels, gray dots appear on the 0.75 threshold. This indicates a period of compression, often preceding a significant price breakout.
• Threshold Crossings: The 0.75 level serves as a primary pivot. Crossing above 0.75 suggests increasing volatility suitable for trend-following, while staying below it suggests a ranging market suitable for mean-reversion.
• Momentum Ribbon: The ribbon at the bottom of the indicator shows linear regression momentum. Bright colors (Green/Red) indicate strong momentum when VCI is above 0.5, while faded colors suggest weakening momentum.
• VWAP Distance: A small dashboard displays the distance between price and the VWAP, normalized by ATR, to assist in identifying overextended price action.

Details

The indicator calculates the Volatility Cycle by dividing the Standard Deviation of closing prices by the Average True Range. This normalization makes the volatility reading relative to recent price action rather than absolute price value. The squeeze logic compares the width of Bollinger Bands (Standard Deviation based) to Keltner Channels (ATR based). When the bands are inside the channels, the market is in a "squeeze" state. The momentum component uses a linear regression of price relative to the average of the highest high, lowest low, and a simple moving average.

Settings

Volatility Settings

• StdDev Length: The lookback period used for the Standard Deviation calculation.
• ATR Length: The lookback period for the Average True Range used to normalize the volatility.

Squeeze Settings

• BB Multiplier: The standard deviation multiplier for the Bollinger Bands component.
• KC Multiplier: The multiplier for the Keltner Channels component.
• KC Length: The lookback period for calculating Keltner Channels.

Momentum Settings

• Momentum Length: The lookback period used for the Linear Regression Momentum calculation.

VWAP Analysis

• ATR Period (VWAP Distance): The period used to calculate ATR for normalizing the price distance from VWAP.

Style & Zones

• Show Background Zones: Toggles the visibility of the color-coded volatility background levels.
• VCI Line Color: Customizes the color of the main Volatility Cycle line.

FAQ

How do I interpret the background zones?

The zones represent different volatility intensities: Gray (Low, 0.5-0.75), Yellow (Base, 0.75-1.0), Blue (Elevated, 1.0-1.5), Purple (Extreme, 1.5-2.0), and Magenta/Red (Maximum, >2.0).

Can I use this for directional signals?

The VCI itself is non-directional. However, you can use the built-in Momentum Ribbon or the VWAP Distance dashboard to determine the likely direction of the trend or potential reversals.

How do I access Volatility Cycle Indicator?

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