Volatility-Adjusted Momentum Score (VAMS) [QuantAlgo]

🟢 Overview

The Volatility-Adjusted Momentum Score (VAMS) measures price momentum relative to current volatility conditions, creating a normalized indicator that identifies significant directional moves while filtering out market noise. It divides annualized momentum by annualized volatility to produce scores that remain comparable across different market environments and asset classes.

The indicator displays a smoothed VAMS Z-Score line with adaptive standard deviation bands and an information table showing real-time metrics. This dual-purpose design enables traders and investors to identify strong trend continuation signals when momentum persistently exceeds normal levels, while also spotting potential mean reversion opportunities when readings reach statistical extremes.

🟢 How It Works

The indicator calculates annualized momentum using a simple moving average of logarithmic returns over a specified period, then measures annualized volatility through the standard deviation of those same returns over a longer timeframe. The raw VAMS score divides momentum by volatility, creating a risk-adjusted measure where high volatility reduces scores and low volatility amplifies them.

This raw VAMS value undergoes Z-Score normalization using rolling statistical parameters, converting absolute readings into standardized deviations that show how current conditions compare to recent history. The normalized Z-Score receives exponential moving average smoothing to create the final VAMS line, reducing false signals while preserving sensitivity to meaningful momentum changes.

The visualization includes dynamically calculated standard deviation bands that adjust to recent VAMS behavior, creating statistical reference zones. The information table provides real-time numerical values for VAMS Z-Score, underlying momentum percentages, and current volatility readings with trend indicators.

🟢 How to Use

1. VAMS Z-Score Bands and Signal Interpretation

• Above Mean Line: Momentum exceeds historical averages adjusted for volatility, indicating bullish conditions suitable for trend following
  
• Below Mean Line: Momentum falls below statistical norms, suggesting bearish conditions or downward pressure
  
• Mean Line Crossovers: Primary transition signals between bullish and bearish momentum regimes
  
• 1 Standard Deviation Breaks: Strong momentum conditions indicating statistically significant directional moves worth following
  
• 2 Standard Deviation Extremes: Rare momentum readings that often signal either powerful breakouts or exhaustion points
  

2. Information Table and Market Context

• Z-Score Values: Current VAMS reading displayed in standard deviations (σ), showing how far momentum deviates from its statistical norm
  
• Momentum Percentage: Underlying annualized momentum displayed as percentage return, quantifying the directional strength
  
• Volatility Context: Current annualized volatility levels help interpret whether VAMS readings occur in high or low volatility environments
  
• Trend Indicators: Directional arrows and change values provide immediate feedback on momentum shifts and market transitions
  

3. Strategy Applications and Alert System

• Trend Following: Use sustained readings beyond the mean line and 1σ band penetrations for directional trades, especially when VAMS maintains position in upper or lower statistical zones
  
• Mean Reversion: Focus on 2σ extreme readings for contrarian opportunities, particularly effective in sideways markets where momentum tends to revert to statistical norms
  
• Alert Notifications: Built-in alerts for mean crossovers (regime changes), 1σ breaks (strong signals), and 2σ touches (extreme conditions) help monitor multiple instruments for both continuation and reversal setups