What is Volatility Index?
The Volatility Index draws a line of dots that trails price, below it in an uptrend in teal and above it in a downtrend in red. In an uptrend the dot sits three average true ranges below the highest close since the trend began; in a downtrend, three ATRs above the lowest close. When price closes through the dots, the trend flips and the dots jump to the other side.
The Volatility Index is a trailing stop that adapts to volatility. Despite the name it is not a measure of market volatility in its own right, it does not accelerate as a trend ages, and it is always either long or short.
How to use Volatility Index
- Dots below or above. Teal dots under price mean an uptrend, red dots above it mean a downtrend.
- The flip. A close through the dots switches the trend. It confirms that price has moved against the trend by more than the ATR multiple.
- As a trailing stop. Within a trend the dots only tighten, never loosen, so they can be used as a stop level that follows the best close.
- Volatility gives room. When the ATR rises, new highs or lows add less to the stop, so the trend is given more room than a fixed-distance stop would give it.
These are ways to read the dots, not entry signals on their own.
Settings
| Setting | Default | What it changes |
|---|---|---|
| Length | 10 | Bars in the average true range. Lower reacts faster to changes in volatility; higher is steadier. Minimum 1. |
| ATR Multiplier | 3 | How many ATRs the stop sits from the best close. Lower hugs price and flips more often; higher gives trends more room. Range 0.001 to 100. |
| Source | Close | The price that sets the best close, decides the flip and places the stop. Open, high, low and the averaged sources such as hl2 and hlc3 are also available. |
Adjust the ATR length, multiplier and price source in the indicator settings.
Calculation
The stop is a multiple of the average true range away from the most extreme close since the last flip, and within a trend it can only move in the trend's favour:
ATR = Wilder's smoothing of true range over 10 bars
arc = 3 * ATR
uptrend: stop = max(previous stop, highest close since flip - arc)
downtrend: stop = min(previous stop, lowest close since flip + arc)
close below the stop in an uptrend flips to a downtrend
close above the stop in a downtrend flips to an uptrend
on a flip: stop = close + arc (new downtrend) or close - arc (new uptrend)The ATR uses Wilder's smoothing, started from the simple average of the first 10 true ranges. On the first bar the true range is the bar's high minus its low, since there is no previous close. Until the ATR has 10 bars, that bar's true range stands in for it, so the dots appear from the first bar rather than 10 bars late.
The first bar starts in an uptrend with the best close set to that bar's close. On every flip the best close resets to the current close.
The values are drawn as dots rather than a line, because the stop jumps across price at a flip and a joining line would mean nothing.
Limitations
- It is always in a trade. There is no neutral state, so a sideways market produces repeated flips.
- It lags. A flip needs a close three ATRs back from the best close, so it confirms a reversal well after it has begun.
- The warm-up is rough. For the first 10 bars the distance uses a single bar's true range instead of an average, so early stops can be unusually tight or wide.
- History affects it. Each value depends on every earlier bar, so a chart with more history loaded can show different dots until the two versions flip at the same point.
- The live candle can flip. The current bar's dot can switch sides and back while the bar is live; the flip only settles at the close.
Frequently asked questions
The Volatility Index here is Wilder's volatility system, a trailing stop set a multiple of the average true range away from the best close since the trend began. It sits below price in an uptrend and above it in a downtrend, and flips when price closes through it.
No. It uses the [average true range](/library/indicator/atr) to place a stop, but what it plots is a price level, not a volatility reading. To see volatility itself, use the ATR or one of the historical volatility indicators.
Parabolic SAR closes in faster the longer a trend runs, whatever the volatility. The Volatility Index does not accelerate. It follows the best close and keeps its distance as a multiple of the ATR. SuperTrend also uses the ATR, but measures from each bar's midpoint rather than from the best close since the flip.
Yes. The indicator declares three inputs: Length, default 10 with a minimum of 1; ATR Multiplier, default 3, from 0.001 to 100; and Source, default close. Open the indicator's settings on the chart to change them.
Closed bars are not revised. The live bar's dot moves with price and can flip sides before the bar closes, so a flip is only confirmed at the close. Because each dot depends on all earlier bars, loading older history can also change the dots until the next flip that both versions share.
Use the Add to chart button at the top of this page. It opens BTC/USDT on Binance in the Altrady Charts terminal with the built-in Volatility Index already applied. On any other market, open the indicator picker on the chart and choose Volatility Index from the Trend group.