The proverbial saying the calm before the storm is not only observed in nature,
but also in our daily life.
I'm not particular fond of using this idiom,
as it has been used to death by the fiancial people.
But it is to our interest to have a measure for defining the calm,
for we will like to be with the next explosive move.
The Historical Volatility Ratio compares a short to a long average historical volatility.
When the ratio of the short to the long volatility falls below 50% for example,
it may be a signal that the market is primed for a move.
Here, we make use of the mean reverting patterns in volatility.
This pattern is in fact one of the property in the ARCH model which won Mr Engle a Nobel Prize in Economic Sciences.
Note we do not predict the direction of the next move,
for predicting prices are best left for fortune tellers.
Below is a formula for Metastock, which compare the 10 period historical volatility to 100 period historical volatility. 0.5 is 50% in this case.
The values chosen are arbitrary
| CODE |
Std(Log(C/Ref(C,-1)),10)/Std(Log(C/Ref(C,-1)),100) < 0.5
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You can do a google on historical volatility,
if you are interested to know more.