UK Accounting Glossary
The volatility ratio is an indicator developed by Jack D. Schwager to identify trading range and signal potential breakouts. The volatility ratio is defined as the current day’s true range divided by the true range over a certain number of days N (i.e. N periods). The following formula is used to calculate the volatility ratio:
Today’s True Range = MAX (today’s high, yesterday’s close) – MIN (today’s low, yesterday’s close)
True Range over N number of days= MAX (Day1 High, Day 2 High, …Day N High, Day 0 Close) minus MIN(Day1 Low, Day 2 Low, …Day N Low, Day 0 Close)
For example, the volatility ratio for a stock with a true range of 1.5 and a true range over the last 10 days of 3.5 would be 1.5/3.5 = 0.428. This volatility ratio is bordering on significant. No rules or numbers are set in stone, but a volatility ratio higher than 0.5 will generally signify to some traders that a reversal is likely. The use of a volatility ratio helps to identify situations where the price of a stock has moved out of its true range and may signal possible reversal days in the near future. Volatility ratio is typically charted below the price chart as a line graph.
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This glossary post was last updated: 5th February 2020.