Expected Volatility, Range, and Estimated Volatility

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Overview

The Expected Volatility, Expected Range, and Estimated Volatility Indicator helps traders quantify and visualize the expected price movement of a financial instrument based on historical price changes. Unlike traditional historical volatility measures that are annualized, this indicator calculates expected volatility using a proprietary transform model directly from historical price data over a specified period. This provides an immediate, timeframe-specific estimate of expected volatility without annualization, making it more directly applicable to the current trading timeframe.

This indicator should be used with the Mean and Standard Deviation Lines to enhance analysis by combining price distribution and volatility insights.

Inputs

• Volatility Period (Bars): Determines the number of bars used to calculate the expected volatility. For accurate visualization, it is recommended to set this period to be the same as the one used in the Mean and Standard Deviation Lines indicator. Adjusting this period can make the indicator more responsive to recent price changes or smooth out short-term fluctuations.
  
• Plot Mode: Choose between "Percent" or "Base Currency" to display the indicator's outputs either as a percentage or in the asset's base currency value.
  

Outputs

1. Expected Volatility (Orange Line): Displays the expected volatility calculated using the transform model based on historical price changes over the specified period and serves as a reference for typical market movements and aiding in the identification of high-risk periods or potential breakout opportunities.
   
2. Expected Range (Red Line): Represents the expected price movement range based on the expected volatility.
   
3. Estimated Volatility (Yellow Line): Provides an alternative volatility measure based on the intraday range (high-low) relative to the previous close, offering additional insights into price fluctuations within each bar.
   

How to Use

Risk Management

You can use either the Expected Volatility or the Expected Range to set stop-loss and take-profit levels based on your preference. Using the Expected Volatility values will generally result in tighter stop-loss levels, potentially exiting trades earlier, while using the Expected Range may allow for more room to accommodate price fluctuations.

Historical Performance Analysis

Monitor when the Estimated Volatility (yellow line) crosses above the Expected Volatility or Expected Range lines (orange and red lines). Such crossings indicate periods where actual market volatility exceeded expected levels, providing insights into the historical effectiveness of your stop-loss or take-profit strategies.

Combined Analysis with Mean and Standard Deviation Lines

Use this indicator alongside the Mean and Standard Deviation Lines to gain a comprehensive view of both price distribution and volatility. Ensure that the Volatility Period is set to the same value in both indicators for accurate visualization and comparison. This combined approach enhances your ability to identify significant price movements and adjust your trading strategy accordingly.

Trend Analysis

Observe changes in the Expected Volatility values to identify periods of increasing or decreasing market volatility, which may signal potential trend developments or reversals.

Identifying Typical and Extreme Conditions

The Expected Volatility serves as a benchmark for typical market movements, aiding in the identification of high-risk periods or potential breakout opportunities when price action moves beyond this range.

Preference-Based Strategy

Choose between using the Expected Volatility or Expected Range based on your risk tolerance and trading strategy. The Expected Volatility provides a more conservative approach, while the Expected Range allows for greater flexibility in accommodating market fluctuations.

Additional Notes

• For accurate visualization, set the Volatility Period to the same value used in the Mean and Standard Deviation Lines indicator. This alignment ensures consistency in your analysis and enhances the reliability of the insights gained from both indicators.
  
• Be mindful that higher volatility periods can present both opportunities and increased risk; appropriate risk management practices are essential.
  
• Important: The Expected Volatility calculated by this indicator is not annualized, unlike traditional historical volatility measures. This makes it directly applicable to the timeframe of your analysis, providing a more immediate estimate of expected price movements.