Volatility Differentials by David Varadi: High/Low vs. Close/Close Volatility

Author: Eugene

Creation Date: 3/29/2011 8:47 AM

Wealth Lab » Technical Indicators » Volatility Differentials by David Varadi: High/Low vs. Close/Close Volatility

Eugene

3/29/2011 8:47 AM

Here's a zero-day simple volatility contraction/expansion indicator by David Varadi. Check out his blog post:

Volatility Differentials: High/Low Volatility versus Close/Close Volatility (HLV-CCV)

Requires Community.Indicators (optional):

CODE:
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Here's a zero-day simple volatility contraction/expansion indicator by David Varadi. Check out his blog post:

[LINK=http://cssanalytics.wordpress.com/2011/03/29/volatility-differentials-highlow-volatility-versus-closeclose-volatility-hlv-ccv/]Volatility Differentials: High/Low Volatility versus Close/Close Volatility (HLV-CCV)[/LINK]

Requires [b][LINK=/Extensions/Details/CommunityIndicators-11]Community.Indicators[/LINK][/b] (optional):

[CODE]using System;
using System.Collections.Generic;
using System.Text;
using System.Drawing;
using WealthLab;
using WealthLab.Indicators;

using Community.Indicators;

namespace WealthLab.Strategies
{
	public class VolatilityDifferentials : WealthScript
	{
		private StrategyParameter paramPeriod;
		
		//For now, I will present the simplest variant of HLvol vs CCvol:
		
		public VolatilityDifferentials()
		{
			paramPeriod = CreateParameter("SMA period", 10, 5, 10, 5);
		}
		
		protected override void Execute()
		{
			//1) take today’s high minus low 
			//and subtract the absolute value of the difference between today’s close and yesterday’s close:
			//raw differential= (H-L)- abs(C- C t-1)
			
			DataSeries rd = (High-Low) - DataSeries.Abs(Close-(Close>>1));
			rd.Description = "HLvol vs CCvol";
			
			//2) take the average, in this case the 5-day or 10-day sma of the raw differential
			
			int period = paramPeriod.ValueInt;
			SMA rdma = SMA.Series( rd,period );
			
			ChartPane rdPane = CreatePane( 30,true,true ); HideVolume();
			PlotSeries( rdPane, rd, Color.DeepPink, LineStyle.Solid, 1 );
			PlotSeries( rdPane, rdma, Color.Orchid, LineStyle.Solid, 1 );
			
			//3) when the current differential is below the average differential this indicates that volatility has contracted 
			//and is likely to expand, the reverse is true when the differential is above average.
			
			for(int bar = period; bar < Bars.Count; bar++)
			{
				if( rd[bar] < rdma[bar] )
					SetBackgroundColor( bar, Color.FromArgb( 50, Color.Red ) );
				else
					SetBackgroundColor( bar, Color.FromArgb( 50, Color.Blue ) );
			}
			
			DrawLabel( PricePane, "Reddish = Volatility contraction", Color.FromArgb( 150, Color.Red ) );
			DrawLabel( PricePane, "Bluish = Volatility expansion", Color.FromArgb( 150, Color.Blue ) );
			
			//Note: the net difference between today’s raw differential and the 5 or 10-day sma of the raw differential 
			//can be normalized using a z-score or a percentile ranking. 
			
			DataSeries diff = rd-rdma; diff.Description = "Difference";
			PercentRank pr = PercentRank.Series(diff,252);
			PrcRank pc = PrcRank.Series(diff,252);			
			
			ChartPane p = CreatePane( 30,true,true );
			PlotSeries( p, pr, Color.Red, WealthLab.LineStyle.Solid, 1 );
			PlotSeries( p, pc, Color.Blue, WealthLab.LineStyle.Solid, 1 );
		}
	}
}[/CODE]

Wealth Lab » Technical Indicators » Volatility Differentials by David Varadi: High/Low vs. Close/Close Volatility