Short vs. Long Volatility

The Short vs. Long Volatility indicator is an experimental tool designed to visualize and compare the relationship between short-term and long-term price fluctuations to identify volatility shifts. By calculating a derivative value from these two volatility scales, it provides traders with a dynamic perspective on whether the current market environment is experiencing expanding or contracting volatility relative to historical norms.

Usage

The indicator can be used to gauge the intensity of market movements. It displays a "Long" volatility component as a histogram from the baseline and a "Short" volatility component as an inverted histogram from the top.

The blue "Derivative" area plot is the primary signal for identifying volatility extremes:

• Low Volatility (1.0): When the derivative line sits near the level 1 line, it indicates a period of relative calm or consolidation.
• High Volatility (2.0): When the derivative line crosses above the level 2 threshold, it signals a significant spike in price activity, often associated with trend breakouts or high-momentum moves.

Details

The script calculates volatility based on the absolute difference between the current and previous closing prices.

• Long Volatility: Normalizes the price difference against the historical maximum difference recorded throughout the chart's history, smoothed by an EMA.
• Short Volatility: Normalizes the price difference against the highest difference within a rolling 100-period window.
• Derivative: This is the ratio between short-term and long-term volatility. The final "Derivative Line" is plotted as 1 + (1 / derivative). This calculation helps highlight moments where short-term momentum is significantly deviating from the long-term volatility profile.

Settings

• Smooth: Adjusts the length of the Exponential Moving Average (EMA) applied to the volatility calculations. Increasing this value will result in a smoother, less reactive output, while a value of 1 provides the rawest calculation.

FAQ

How do I interpret the blue area plot?

The blue area represents the derivative line. Values approaching or exceeding 2.0 indicate that short-term volatility is high relative to long-term volatility, often marking significant market events.

What is the difference between the "Long" and "Short" histograms?

The "Long" histogram tracks volatility against the lifetime maximum price change of the asset, providing a macro view. The "Short" histogram tracks volatility against a 100-period lookback, focusing on recent price behavior.

How can I access the Short vs. Long Volatility indicator?

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