Volatility System

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Description

With the Volatility System indicator, the indication to buy/sell occurs when the closing price rises/drops by some significant amount, K, more than the average volatility of the given period.

K is a constant and is taken to be 3. (According to Wilder, this value can range from 2.80 to 3.10 and was found through testing.)

The average volatility is taken to be the ATR or Average True Range volatility.

The trading rules¹ are:

• Sell if the closing price drops by more than K x (ATR) below the previous close.

• Buy if the closing price rises by more than K x (ATR) above the previous close.

Another method² of using the Volatility System is:

• For long positions: Go short (sell) if the closing price drops by more than K x (ATR) below the highest close of the given period.

• For short positions: Go long (buy) if the closing price rises by more than K x (ATR) above the lowest close of the given period.

References:

1. Kaufman, P.J. (1998). Trading Systems and Methods 3rd Edition. John Wiley and Sons, pp.96-97.

2. Wilder, J. W. (1978). New Concepts in Technical Trading Systems. Trend Research.