2017issue C088-13
How lookbacks, sign, and bands construct a volatility oscillator
A lookback standard deviation is divided by a simple moving average of the same length and multiplied by 100 so the series is a normalized percentage of that average. The reading is signed from a short versus long average, bands sit at the highest normalized standard deviation, and later price confirmation is required after a band touch, squeeze, or divergence.
- The oscillator divides a lookback standard deviation by a simple moving average of the same length and scales the ratio so it is a normalized percentage of that average.
- Its sign comes from whether a short simple moving average sits above or below a longer one, and a zero second parameter uses the close in place of the short average.
- Bands sit above and below the zero line at the highest normalized standard deviation over a chosen lookback, while the oscillator itself is unbounded.
- A band touch, squeeze, or divergence is treated as incomplete until price leaves a range or breaks a trendline, support, or resistance.
How the oscillator is built
The oscillator is built by taking a lookback standard deviation, dividing it by a simple moving average of the same length, and multiplying the ratio by 100 so the series is a normalized percentage of that moving average. That construction is the relative volatility index, a normalized volatility oscillator (VolatOsc) that is later signed so the series can cross a zero line.
Sign, parameters, and the zero line
The oscillator is positive when a short simple moving average is above a longer one and negative when the short average is below. A zero second parameter replaces the short average with the close. A common default parameter triple is 20, 3, and 20, and those three numbers may be changed to match a different sampling style.
Band placement
Volatility bands sit above and below the zero line at the highest normalized standard deviation over a chosen band lookback, while the oscillator itself is unbounded. The same normalized standard-deviation series supplies those envelope levels. The bands can be read alongside Bollinger BandWidth as squeeze or expansion context.
Overbought and oversold readings
A touch of the upper band is treated as an overbought reading and a touch of the lower band as an oversold reading. In a strong directional move those readings can persist instead of reversing.
Divergence and later confirmation
A bullish divergence is a lower price low against a higher oscillator low. A bearish divergence is a higher price high against a lower oscillator high. Both are presented as needing later confirmation.
Price breakout as confirmation
Breakout confirmation is defined as price leaving a range or breaking a trendline, support, or resistance after an oscillator band touch, squeeze, or divergence. Chart examples treat unconfirmed oscillator touches as incomplete.
Oscillator squeeze and BandWidth
A band squeeze on the oscillator together with relatively low Bollinger BandWidth is shown as a contraction setup that can precede a later trendline break.
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