2017issue C118-9
Building a signed relative-volatility oscillator
A relative-volatility-index can be formed from closes first, then signed by a short-versus-long moving-average comparison and framed by a volatility-envelope, so each construction step stays visible before the combined oscillator is treated as a finished plot.
- A relative-volatility-index is formed by dividing the lookback standard deviation of closing prices by a simple moving average of those closes and multiplying the ratio by 100.
- A signed-multiplier of 1, -1, or 0 is assigned by comparing a three-observation moving-average with a 20-observation moving-average.
- The plotted oscillator is the relative-volatility series multiplied by that signed-multiplier.
- A volatility-envelope sets the upper bound to the highest relative-volatility reading over a 20-observation lookback-period and sets the lower bound to the negative of that highest reading.
A reading before a plot
This article follows a historical construction for a signed oscillator built from a relative-volatility-index, a moving-average pair, and a volatility-envelope.
The archive facts describe that workflow as a sequence of separate series. They do not present the finished plot as the only object worth inspecting.
Form the relative-volatility series
A relative-volatility-index is a scaled reading that expresses a lookback standard deviation of closes as a percentage of a simple moving average of those same closes.
A relative-volatility series can be formed by dividing the lookback standard deviation of closing prices by a simple moving average of those closes and multiplying the ratio by 100.
In the supplied construction the standard-deviation window and the longer simple moving average both use 20 observations. Each of those windows is a lookback-period: a fixed count of ordered observations used for the standard deviation, each moving average, or the envelope window.
Attach a moving-average vote
A moving-average is a simple average of ordered closes used both as the volatility denominator and as a short-versus-long pair that assigns direction.
A second simple moving average of three closing observations is compared with the 20-observation average. That comparison assigns a signed-multiplier of 1 when the shorter average is higher, -1 when the longer average is higher, and 0 when the two averages are equal.
The signed-multiplier is a three-state factor that is positive when the shorter average is above the longer average, negative when the reverse is true, and zero when the two averages are equal.
Multiply to obtain the oscillator
The plotted oscillator is the relative-volatility series multiplied by that signed factor.
Add a volatility envelope
A volatility-envelope is a pair of bounds formed from the highest relative-volatility reading over a third lookback and from the negative of that highest reading.
In the supplied construction an upper bound is the highest relative-volatility reading over a 20-observation window, and a lower bound is the negative of that highest reading.
Three independent period inputs
The construction is parameterized by three independent period inputs that default to 20, 3, and 20.
Editorial interpretation: those defaults line up with the 20-observation volatility and longer-average windows, the three-observation shorter average, and the 20-observation envelope window, while leaving each lookback-period free to be changed on its own.
All readings on this track · 7 readings
- 1990Constructing a two-line relative volatility index
- 1993A volatility-direction filter for dual moving-average crossovers
- 1995Constructing the relative volatility index and inertia
- 1995Constructing a high-low relative volatility trend filter
- 2005Genetic optimization of relative-volatility crossover rules
- 2017How lookbacks, sign, and bands construct a volatility oscillator
- 2017Building a signed relative-volatility oscillator