Volatility Ratio

What Is the Volatility Ratio?

The volatility ratio is a technical measure used to recognize price examples and breakouts. In technical analysis, it utilizes true reach to gain a comprehension of how a security's price is moving on the current day in comparison to its past volatility.

There are several unique renditions of volatility ratios, the most common being variations of average true range (ATR).

Grasping Volatility Ratios

The volatility ratio is a measure that assists investors with following the volatility of a stock's price. It is a rare example of technical indicators zeroed in on volatility. By and large, the standard deviation is ordinarily one of the most common measures utilized for following volatility. Standard deviation forms the basis for several technical channels including Bollinger Bands.

Exhaustively envelope channels of various assortments are utilized by technical analysts to recognize price reaches and volatility designs that help lead to trading signals. Historical volatility is likewise one more common trendline that can be utilized to follow volatility.

The volatility ratio was developed to add to the analysis of price volatility. Across the industry, volatility and volatility ratio estimations might change. For technical analysis, Jack Schwager is known for introducing the concept of a volatility ratio in his book Technical Analysis.

Computing the Volatility Ratio

Schwager's methodology for working out the volatility ratio expands on the concept of true reach which was developed and presented by Welles Wilder yet has several iterations. Schwager computes the volatility ratio from the following:
$\begin &\text = \frac { \text }{ \text } \ &\textbf \ &\text = \text \ &\text = \text{Today's True Range} \ &\text{Today's True Range} = \text - \text \ &\text = \text{Today's High, Yesterday's Close} \ &\text = \text{Today's Low, Yesterday's Close} \ &\text = \text \ \end$
Different iterations of the volatility ratio might incorporate the following:
$\begin &\text = \frac { \mid \text \mid }{ \text } \ &\textbf \ &\text{| TTR |} = \text \ &\text = \text - \text, \text - \text, \text - \text \ &\text = \text{Today's High} \ &\text = \text{Today's Low} \ &\text = \text{Yesterday's Close} \ \end$
$\begin &\text = \frac { \mid \text \mid }{ \text } \ &\textbf \ &\text = \text \ &\text \ \end$

Volatility Ratio Signals

Investors and traders will have their own instruments for following and identifying designs from the volatility ratio. This ratio is commonly plotted as a single line on a technical chart either as an overlay or in its own display window.

A higher volatility ratio will signal substantial price volatility in the current trading day. By and large, volatility can be a signal of unsettling influences or improvements influencing the security's price. Thusly, high volatility might lead to a recent fad at the security's cost in either a positive or negative heading. Traders follow volatility and the volatility ratio related to other trading patterns to assist with affirming a trading signal for investment.

Highlights

• The most common rendition of a volatility ratio takes the extent of a resource's day true reach to its average true reach.
• Technical traders utilize true reach, or the difference between the high and low prices on some random day, to uncovers how unpredictable a stock is.
• The volatility ratio measures relative changes in a resource's price developments to distinguish trading opportunities.