DYO:Volatility Bands

The Volatility Bands calculate support and resistance levels for tomorrow's price action.  They are excellent for daily areas for support and resistance and frequently are the location for reversals.

The formula for the Volatility Band uses a one day Historical Volatility by multiplying the Historical Volatility by the square root of 1 divided by 365, which is 0.05234.

VB Delta =  Historical Volatility * Sqrt( 1 / 365) * Daily Closing Price * Size Factor
Upper Band (Resistance) =  Close Price + VB Delta
Lower Band (Support) =  Close Price - VB Delta

The Volatility Bands used for market observation are those with a Size Factor of:  1.0, 1.28, 1.5, and 2.0.

This study can be implemented in Ensign Windows using the Design Your Own™ study feature.

Line A calculates the 30 bar Historical Volatility and stores this value in Global Variable [1].  Typical value is 17.50.

Line B adjusts the HV decimal placement by dividing by 100 and resaves HV in [1].   [1] = HV * 0.01

Line C multiplies HV by the 0.05234 factor, which is the square root of  1 / 365.   Result is saved in [2].

Line D calculates the VB Delta = Close * HV * 0.05234.  This VB Delta is stored in [3].

Line E multiplies the VB Delta by one of the Size Factors, which in this example is using 1.50.   Result is saved in [4].

Line F and G plot one pair of Volatility Bands for the VB Delta in [4] by adding it and subtracting it from the Close.

Line H, I and J plot another pair of Volatility Bands for a Size Factor of 2.

The Volatility Band values calculated today are used as Support and Resistance levels the following day.

A template named VolatilityBands can be downloaded from the Ensign web site using the Internet Services form.