With the Volatility System indicator, the indication to buy/sell occurs when the
closing price rises/drops by some significant amount, K, more than
the average volatility of the given period.
K is a constant and is taken to be 3. (According to Wilder, this
value can range from 2.80 to 3.10 and was found through testing.):
The average volatility is taken to be the ATR or Average True Range volatility.
The trading rules1 are:
- Sell if the closing price drops by more than K x (ATR) below the
previous close.
- Buy if the closing price rises by more than K x (ATR) above the
previous close.
Another method of using the Volatility System is:
- For long positions: Go short (sell) if the closing price drops by more than
K x (ATR) below the highest close of the given period.
- For short positions: Go long (buy) if the closing price rises by more than
K x (ATR) above the lowest close of the given period.