What's a good volatility contraction indicator? | Forex Factory

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What's a good volatility contraction indicator?

  • #1
  • First Post: Sep 12, 2015 2:53pm Sep 12, 2015 2:53pm
I'm looking for some sort of indicator that will help me determine when volatility contracts over the last 3-5 bars.

Noting fancy is needed, it's not going to be needed to give a hard and fast tradeable signal, rather just an indication that volatility has reduced.

If anyone has got any ideas, I'd love to hear them, thanks.
Road To Wisdom? To err and err and err again, but less and less and less...
  • #2
  • Sep 12, 2015 5:57pm Sep 12, 2015 5:57pm
Hi
Can You show on chart example of volatility increase, because I'm assuming from your post that you know when this is happening..
Thanks
  • #3
  • Sep 12, 2015 6:10pm Sep 12, 2015 6:10pm
Best volatility indicators I know of Is 1. time of day... example London session usually more volatile then Asian. 2. Data and news.. example NFP is usally volatile. 3 time in general.. example between chrismas and new years may be a real slow doggy time in the market. Part of your job as a trader is to guess the volatility correctly.

for volatility contraction: use candle size.. if candles are getting smaller volatility is contracting... Don't try to overcomplicate everything with indicators.. Use your eyes and brain.... Most of its right on the chart.. If you see candles getting smaller and 12 hour till next data volatility is probably contracting..
The only system that will work is one designed by and for yourself.
  • #4
  • Sep 12, 2015 8:29pm Sep 12, 2015 8:29pm
Quoting Calculus
I'm looking for some sort of indicator that will help me determine when volatility contracts over the last 3-5 bars. Noting fancy is needed, it's not going to be needed to give a hard and fast tradeable signal, rather just an indication that volatility has reduced. If anyone has got any ideas, I'd love to hear them, thanks.
Average True Range.
  • #5
  • Sep 13, 2015 3:48am Sep 13, 2015 3:48am
[quote= for volatility contraction: use candle size.. if candles are getting smaller volatility is contracting... Don't try to overcomplicate everything with indicators.. Use your eyes and brain.... Most of its right on the chart.. If you see candles getting smaller and 12 hour till next data volatility is probably contracting..[/quote]

I think you'e right, it's all there on the chart. This is basically what I've been doing looking at the chart, but sometimes when I lose concentration I miss things so was looking for some simple indicator where I could add an alarm etc.

As ever though, THE best indicator is our brains + concentration, concentration is so important in this game.

Thanks guys.
Road To Wisdom? To err and err and err again, but less and less and less...
  • #6
  • Sep 13, 2015 4:07am Sep 13, 2015 4:07am
Simple indicator:
Put MA envelope on chart and define the size of the envelope, when price is outside the envelope the volatility has increased when price is coming back volatility decrease
  • #7
  • Sep 13, 2015 4:41am Sep 13, 2015 4:41am
Bollinger Bands give you clear information when market is contracting by the decreasing width between the outer bands.
I think also you may find many Bollinger width histogram indicators that will graphically show this.
It never gets easier, you just get better
  • #8
  • Sep 13, 2015 9:31am Sep 13, 2015 9:31am
Quoting Calculus
I'm looking for some sort of indicator that will help me determine when volatility contracts over the last 3-5 bars.

Just set the ATR to 3-5 bars, then? That's exactly what that indicator measures.
  • #9
  • Sep 13, 2015 10:58am Sep 13, 2015 10:58am
What is also in my opinion important the cyclic nature of volatility on lets say H1 and lower but I couldn't find this nature lets say D1 and higher(it is there but not so nice)
  • #10
  • Sep 13, 2015 11:32am Sep 13, 2015 11:32am
Quoting Calculus
I'm looking for some sort of indicator that will help me determine when volatility contracts over the last 3-5 bars. Noting fancy is needed, it's not going to be needed to give a hard and fast tradeable signal, rather just an indication that volatility has reduced....
Wide Range Body (or Bar) WRB analysis may be just what you are looking for. By definiton, WRB analysis is a form of volatility analysis.

First, the term WRB has a different meaning depending on the type of chart you are using. "B" in WRB means Body for candlestick chart users and it means Bar for bar chart users.

A Wide Range Body (candlestick users) is an interval that has a body (difference between the Open and Close) with a price area larger than the bodies of each of the prior three (3) intervals.

Note: You can use any number greater than the above three (3) intervals. But no number less than three (3) due to the behavior of volatility analysis.

Take a look at the charts below.
Attached Image(s) (click to enlarge)
Click to Enlarge Name: EX 7.png Size: 13 KB
Click to Enlarge Name: EX 8.png Size: 13 KB
Without VSA, you're playing checkers while the Smart Money plays chess.
  • #11
  • Sep 13, 2015 7:16pm Sep 13, 2015 7:16pm
As has already been mentioned, the ATR shows the increase/decrease in bar ranges.

If you want to see the increase / decrease in price changes (rather than bar ranges), compute the moving standard deviation of the last 3-5 periods' price changes. This is a more quantitative definition of volatility.

These two different ways of looking at volatility show different information, and different is good if you take a hybrid approach.
  • #12
  • Sep 14, 2015 3:17am Sep 14, 2015 3:17am
Quoting FXEZ
As has already been mentioned, the ATR shows the increase/decrease in bar ranges. If you want to see the increase / decrease in price changes (rather than bar ranges), compute the moving standard deviation of the last 3-5 periods' price changes. This is a more quantitative definition of volatility. These two different ways of looking at volatility show different information, and different is good if you take a hybrid approach.
He can't do that. To estimate the variance one needs 500 samples to get an expected error of 1%. 300 samples if 5% expected error is accepted. With 3-5 samples it's quicker rolling a dice. Also I think Calculus is not really willing to estimate the volatility anyway. The term volatility (variance of the return) is often misused in FF. A very strongly trending market has near zero volatility. While I often read this is a big volatility period. People usually mean something like mometum instead when they say volatility.
No greed. No fear. Just maths.
  • #13
  • Sep 15, 2015 10:49pm Sep 15, 2015 10:49pm
Quoting PipMeUp
{quote} He can't do that. To estimate the variance one needs 500 samples to get an expected error of 1%. 300 samples if 5% expected error is accepted. With 3-5 samples it's quicker rolling a dice. Also I think Calculus is not really willing to estimate the volatility anyway. The term volatility (variance of the return) is often misused in FF. A very strongly trending market has near zero volatility. While I often read this is a big volatility period. People usually mean something like mometum instead when they say volatility.
Yes clearly in any short-term measurement there will be lots of variability and a questionable amount of useful information. How are you computing these expected variance errors relative to the number of samples?
  • #14
  • Sep 16, 2015 5:10am Sep 16, 2015 5:10am
Quoting FXEZ
{quote} Yes clearly in any short-term measurement there will be lots of variability and a questionable amount of useful information. How are you computing these expected variance errors relative to the number of samples?
Through simulation in R
Attached Image (click to enlarge)
Click to Enlarge Name: average_estimation_errors_for_mean_and_var.png Size: 9 KB

Attached File(s)
File Type: txt variance.R.txt   1 KB | 494 downloads
No greed. No fear. Just maths.
  • #15
  • Sep 16, 2015 9:02am Sep 16, 2015 9:02am
Quoting PipMeUp
{quote} Through simulation in R {image} {file}
Thanks for the code. My CPU is cranking away...
  • #16
  • Last Post: Sep 22, 2015 2:34am Sep 22, 2015 2:34am
I love R! Its my favorite letter of the alphabet! ;-)

Also awesome for number crunching and trading simulation ...

EZ
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