L&S Volatility Index

The L&S Volatility Index indicator is a tool designed to help traders identify overpriced or underpriced market conditions by measuring price deviation relative to average historical volatility.

Usage

The indicator is primarily used to identify potential mean reversion opportunities or to confirm the stability of a current price region.

• Mean Reversion: When the L&S Volatility Index value rises above 30%, the asset is considered significantly deviated from its mean (overpriced or underpriced). This suggests a higher probability of price returning to its average.
• Fair Value Region: When the index remains below 30%, the asset is trading within a fair price region relative to its recent volatility. This environment is often more suitable for trend-following or standard buy/sell entries.
• Strategies: The tool is effectively applied in Mean Reversion strategies to find exhaustion points and Breakout strategies to gauge the intensity of a move.

Details

The L&S Volatility Index (LSVI) functions by calculating the percentage difference between the current price and a 21-period Simple Moving Average (SMA). This deviation is then divided by the average historical volatility over the same period.

A key distinction of this script is its non-normalized approach and its specific method for calculating historical volatility. It utilizes Don Fishback's formula, which involves the standard deviation of logarithmic returns annualized by the square root of trading days. By comparing price deviation directly to this volatility metric, the indicator provides a context-aware view of market extremes.

Credits:

• Original concept by L&S Educação Financeira.
• Historical Volatility calculation based on "Odds: The Key to 90% Winners" by Don Fishback.

Settings

• Length: (Default: 21) Determines the lookback period for the Simple Moving Average and the historical volatility calculation.
• Days: (Default: 252) Represents the number of trading days in a year, used to annualize the historical volatility.

FAQ

How do I interpret the 30% threshold?

A value above 30% indicates that the price has moved significantly further from its average than the historical volatility would typically suggest, signaling a potential overextended state.

Can this be used on any timeframe?

Yes, the indicator can be applied to any timeframe, though users should ensure the "Days" setting is adjusted if they wish to change how volatility is annualized for specific markets.

How can I access the L&S Volatility Index?

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