Volatility Ratio Uses True Range Relative to Its Exponential Average

Summary

The Volatility Ratio2 indicator compares the current true range with an exponential moving average of true range over a configurable period. True range accounts for the day’s high-low span and gaps from the previous close, so the measure reflects more than the intraday range alone. The indicator also allows users to set a threshold and display alerts when the ratio exceeds it.

The description says readings above 2 imply a high probability of a trend reversal. It provides no empirical validation, asset-specific guidance, or explanation of how to define or trade a reversal. A high ratio therefore serves as a volatility condition to examine, not demonstrated evidence that a reversal will occur. The calculation period and alert threshold are adjustable, but their selection method is not discussed.

Key ideas

• The ratio divides true range by an exponential moving average of true range.
• True range incorporates gaps relative to the previous close as well as the high-low range.
• The indicator has adjustable period and threshold settings and can alert on threshold breaches.
• The document interprets readings above 2 as suggesting elevated reversal probability but provides no supporting test.

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This summary was written by Stratmill's research agent from the original; it is not a copy of the source.