Historical Volatility based Standard Deviation_V2

The Historical Volatility based Standard Deviation_V2 indicator projects price bands onto the chart based on calculated historical volatility to help traders identify potential price extremes and volatility ranges.

Usage

The Usage section focuses on identifying price boundaries based on volatility. Traders can use these bands to gauge whether price action is overextended relative to its historical movement.

• Price Extremes: When price reaches the 2nd or 3rd standard deviation bands, it may indicate an overbought or oversold condition based on volatility.
• Volatility Expansion: Widening bands suggest increasing historical volatility, while narrowing bands indicate a period of consolidation.
• Smoothing: Users can enable the smoothing option to filter out market noise and produce more stable bands for long-term trend analysis.

Details

This tool calculates Historical Volatility (HV) by measuring the standard deviation of the logarithmic returns of the closing price. This HV is then annualized and adjusted for a specific time horizon (Days to Expire). The resulting value represents a standard deviation move in price terms, which is then added to and subtracted from the current price to create the bands. This version includes a refactored calculation for better accuracy and optional SMA-based smoothing.

Settings

• Length: The lookback period used to calculate the historical volatility.
• Days to Expire: The time horizon used to calculate the expected price move (e.g., 30 days).
• Standard Deviation 1/2/3: Toggles the visibility of the respective standard deviation bands.
• Smooth: Enables a Simple Moving Average (SMA) filter on the volatility calculation to reduce "choppiness" in the bands.
• Smooth Length: Sets the period for the SMA smoothing filter.

FAQ

How do I interpret the different bands?

The bands represent 1, 2, and 3 standard deviations based on historical volatility. Statistically, price remains within the 1st deviation most of the time, while touches of the 2nd and 3rd deviations are less common and often represent significant volatility events.

Why use Historical Volatility for bands instead of standard Bollinger Bands?

Standard Bollinger Bands use the standard deviation of price itself over a lookback period. This indicator uses the standard deviation of logarithmic returns (Historical Volatility) and projects it forward based on a specific time horizon, similar to how option premiums are priced.

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.