The Volatility System study was developed by J. Welles Wilder Jr. He explains it in detail in his New Concepts In Technical Trading Systems.
The Volatility System is a trend-following system.
The paradigm is a stop and reverse trading system with a smoothed moving average of the ranges of previous bars. This average is added to the lowest close (for a buy stop) or subtracted from the highest close (for a sell stop), which occurred while the stop was active. The system allows the stops to back off from the market when volatility increases. However, since the stop is anchored to the highest or lowest close, the backing off is only due to increases in the volatility.
Volatility System Parameters
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Parameter |
Description |
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Color |
Line color. |
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Factor |
Amount by which the average range is multiplied by before it is added to the base. Higher factors result in looser stops and, therefore, less switching between long and short. |
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Period |
Number of bars in the lookback range. |
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At Tick |
If selected, the value is plotted at the nearest tradable price away from the market. In other words, when the volatility stop price is below the bar price it goes to the floor price, and when the volatility stop price is above the market, it will go to the ceiling price. If not selected, volatility stop value is shown at its exact price.. |
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Display |
Line style. Values: •Dash •Cross •Plus |