Volatility Ratio Jack D. Schwager

The Volatility Ratio Jack D. Schwager indicator identifies significant volatility expansions by comparing the current true range to a multi-period true range, helping traders spot potential breakout or trend reversal points.

Usage

The indicator is primarily used to identify price breakouts that occur on high relative volatility. When the Volatility Ratio (VR) crosses above a specific threshold (typically 0.6), it suggests that current price movement is substantial compared to the historical range of the lookback period.

• Buy Signals: Triggered when the Volatility Ratio crosses above the VRT threshold while the current price is higher than the lowest price of the last 5 bars.
• Sell Signals: Triggered when the Volatility Ratio crosses below the VRT threshold while the current price is lower than the highest price of the last 5 bars.
• Visual Aids: Users can enable background coloring and bar coloring to highlight these specific volatility-based conditions directly on the chart.

Details

This tool is based on concepts introduced by Jack D. Schwager. It calculates the current True Range and divides it by the True Range over a specified period length. The formula for the multi-period True Range involves finding the difference between the "True High" (highest high over $n$ periods) and the "True Low" (lowest low over $n$ periods). By normalizing the current range against the broader context, the ratio highlights anomalies in price action that often precede or confirm strong moves.

Settings

• Period: Sets the lookback length used to calculate the historical True Range.
• VRT: The threshold level for the Volatility Ratio (default is 0.6). Crosses of this level generate signals.
• Barcolor: Toggles the coloring of price bars when a signal condition is met.
• Bgcolor: Toggles the background coloring when a signal condition is met.

FAQ

How do I interpret the Volatility Ratio?

The ratio measures current volatility relative to past volatility. A value above the threshold indicates that the current bar's range is significant relative to the total range of the lookback period, often marking the start of a breakout.

Can I change the sensitivity of the signals?

Yes, by adjusting the Period (lookback) and the VRT threshold, you can make the indicator more or less sensitive to price fluctuations.

How can I access Volatility Ratio Jack D. Schwager?

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