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HVR

Historical Volatility Ratio (HVR) is a technical indicator that compares short-term historical volatility with long-term historical volatility to assess changes in market activity.

To use the indicator, you need to use the HistoricalVolatilityRatio class.

Description

The Historical Volatility Ratio (HVR) is a relative volatility indicator that compares short-term volatility with long-term market volatility. The indicator helps determine whether current volatility is increasing or decreasing relative to its historical level.

HVR is calculated as the ratio of short-term historical volatility to long-term historical volatility. Values above 1.0 indicate that current (short-term) volatility is higher than long-term volatility, which may signal increased market activity or a potential trend change.

The indicator is particularly useful for:

  • Identifying periods of high and low volatility
  • Determining potential trend reversal points
  • Adapting trading strategies to current market conditions
  • Assessing market risk and setting appropriate position sizes

Parameters

The indicator has the following parameters:

  • ShortPeriod - period for calculating short-term volatility (default value: 5)
  • LongPeriod - period for calculating long-term volatility (default value: 20)

Calculation

Historical Volatility Ratio calculation involves the following steps:

  1. Calculate short-term historical volatility:

    Short-term Volatility = Standard Deviation of Log Returns over ShortPeriod * Sqrt(Trading Days Per Year)

  2. Calculate long-term historical volatility:

    Long-term Volatility = Standard Deviation of Log Returns over LongPeriod * Sqrt(Trading Days Per Year)

  3. Calculate HVR as the ratio of short-term volatility to long-term volatility:

    HVR = Short-term Volatility / Long-term Volatility

Where:

  • Log Returns - logarithmic returns (ln(Price[i] / Price[i-1]))
  • Standard Deviation - standard deviation
  • Trading Days Per Year - number of trading days in a year (usually 252 for stock markets)
  • ShortPeriod - short period for volatility calculation
  • LongPeriod - long period for volatility calculation

Interpretation

The Historical Volatility Ratio can be interpreted as follows:

  1. Level 1.0:

    • HVR = 1.0 means short-term volatility is equal to long-term volatility
    • HVR > 1.0 indicates short-term volatility is higher than long-term volatility
    • HVR < 1.0 indicates short-term volatility is lower than long-term volatility

  2. Extreme Values:

    • Very high HVR values (e.g., > 2.0) may indicate a sharp volatility increase, often occurring during market panics or strong movements
    • Very low HVR values (e.g., < 0.5) may indicate a volatility compression period, often preceding strong movements

  3. HVR Trends:

    • Rising HVR indicates an increase in current volatility
    • Falling HVR indicates a decrease in current volatility

  4. Trading Strategies:

    • When HVR is high, it may be appropriate to use breakout-based strategies
    • When HVR is low, mean reversion or range trading strategies may be more suitable

  5. Risk Management:

    • High HVR values may signal the need to reduce position sizes due to increased volatility
    • Low HVR values may allow increased position sizes due to reduced volatility

  6. Potential Reversals:

    • Extreme HVR values often precede significant price movements
    • A sharp HVR increase after a low volatility period may signal the start of a new trend

indicator_historical_volatility_ratio

See Also

ATR StandardDeviation ChoppinessIndex

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