Historical Volatility based Standard Deviation

The Historical Volatility based Standard Deviation indicator provides a dynamic price band system that calculates potential price ranges based on annualized historical volatility and specific time horizons. This tool helps traders visualize expected price movement ranges through three distinct standard deviation levels projected onto the chart.

Usage

The Usage of the Historical Volatility based Standard Deviation indicator centers on identifying overextended price action and potential mean reversion zones. Traders can use the three levels of standard deviation bands to gauge the intensity of market moves:

• Standard Deviation 1: Often acts as the first line of resistance or support during normal market conditions.
• Standard Deviation 2 & 3: Represent extreme volatility expansions; price reaching these outer bands may indicate an overbought or oversold state relative to historical volatility.

These bands are particularly useful for option traders or swing traders looking to understand the "expected move" over a specific number of days, as defined by the "Days To Expire" setting.

Details

The indicator calculates Historical Volatility (HV) by taking the standard deviation of the logarithmic returns over a user-defined length. This value is then annualized using a square root of time calculation (assuming 365 days).

The tool then projects three price bands:

1. Level 1: Based on the standard 1 SD calculation for the specified expiration period.
2. Level 2: Scaled by a factor of 1.3971.
3. Level 3: Scaled by a factor of 1.4675.

The calculation automatically adjusts its time-based multiplier depending on whether the chart is intraday/daily or weekly to maintain accuracy in the annualization process.

Settings

• Length: The lookback period used to calculate the standard deviation of log returns.
• Days To Expire: The time horizon (in days) used to project the expected price move bands.
• Standard Deviation 1: Toggles the visibility of the first standard deviation upper and lower bands.
• Standard Deviation 2: Toggles the visibility of the second standard deviation upper and lower bands.
• Standard Deviation 3: Toggles the visibility of the third standard deviation upper and lower bands.

FAQ

How do I access Historical Volatility based Standard Deviation?

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

Can this indicator be used on intraday timeframes?

Yes, the script includes logic to handle intraday, daily, and weekly timeframes, adjusting the annualization factor accordingly.

What do the different colors represent?

By default, the first standard deviation bands are colored red (upper) and green (lower). The second deviation levels are blue, and the third deviation levels follow the chart's foreground color.