Volatility-Adaptive Indicators

Volatility-Adaptive indicators continually and, if necessary, dynamically change the number of bars used to calculate the plot. Generally, this is done by first calculating a price proxy using a zero-lag moving average (we will not disclose the type of moving average used). The adaptive tuning parameter, is largest when the difference between the current price and the previous value of the price proxy is greatest, thus causing the price proxy to be more responsive to the price change.

The tuning parameter, is based on a normalized deviation over the observation length. Thus if the difference is small relative to the recent maximum and minimum differences, the tuning parameter will be small and the price proxy will therefore be very smooth; on the other hand, if the price changes rapidly, the price proxy will follow the price closely, whereas, if the price stagnates, the price proxy will not change much.

This characteristic helps eliminate whipsaw trades in sideways markets while quickly showing transitions into trending states. A (user-defined lookback period) median filter is used to smooth the adaptive tuning factor because, without it, the tuning parameter itself is very noisy, and undesired adaptation to noise spikes can result. Thus, at all times, the indicator plot is optimized for the way that the market is oriented on that bar. There is no need to keep adjusting the period, so as to try to find an optimum period.

In most of our indicators, it is possible to specify that the plot should be calculated with the actual price rather than the price proxy. This will usually result in a more noisy plot.

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