Volatility Projection

Today the market moves up, tomorrow it might move down, but is this of any importance or just random noise? This volatility projection indicator will tell you if there is something exceptional happening.

Standard Deviation and Volatility Projection

The standard deviation of market movements is a widely used measure to define exceptional events on the market. An example: Bollinger Bands  uses standard deviation to define if a market has moved too far away from it’s moving average. Value at Risk would be another indicator.  It uses the standard deviation of returns to define the “normal” behavior of market movements.

This article is about a volatility projection indicator.  It has a neutral market outlook. This means it does not take the current trend into account, like Bollinger Bands would do. It just plots an upper and lower boundary, according to standard deviation.

Volatility Projection Indicator

The volatility projection indicator plots a two standard deviation wide volatility projection on your chart. It uses all historic data on the chart to calculate the volatility. You can define on the properties page of the indicator if you would like to see an intraday / weekly / monthly or yearly volatility projection.

Inside  the volatility cone the market does what a normal distributed time series is expected to do. As soon as the market leaves the volatility cone it has moved more than expected. You should be on alert and might want to use this non-normal behavior to either take profits or stop out the position.

Scan for exceptional Market Behavior

You can use this indicator to find equities which show an unusual behavior. Therefore you would open a scanner with your favorite markets and apply this indicator.

Set the history length of the scanner to at least 500 bars. This is needed to get a useful estimation of market volatility. Then use the filter function to scan for equities which trade outside of the volatility cone. The screen shot below shows a sample scan and how the filter is applied.

Volatility Projection Indicator Code



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