Volatility Score Indicator Michael Burke Vice-President Client Education

TSLabs@TradeStation.com

Features

Focus: Opportunity Scanning

Markets: Stock, Futures, and Forex

Time Perspective: All

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Summary Finding Hidden Trading Opportunities Active traders often measure opportunity in terms of market volatility. More volatility means more trading opportunities, but in the last few months market volatility in the major indices as measured by the VIX volatility index ($VIX.X) and other volatility indicators like Average True Range has fallen to low levels. However, there are always trading opportunities somewhere in the market: symbols that are on the move or in play because of news and other factors. The question is, how do you uncover these hidden opportunities? Opportunity in Volatility As active traders know, there is opportunity in volatility. Volatility can be measured in a number of ways, and TradeStation incorporates several volatility indicators for this very purpose. TradeStation lets you use these indicators to scan the universe of symbols for stocks with the highest volatility, and you can tailor this scanning to match your trading style and objectives. Volatility as a Measure of Trading Potential One way active traders can measure volatility is to look at the average daily high-to-low trading range for a symbol. The TradeStation indicator Average True Range can calculate this daily price movement potential, and can be used to scan for those symbols with the highest daily trading range volatility. Average True Range is a standard TradeStation indicator that measures volatility by averaging the true range of a bar over a look-back period. Higher values mean higher volatility. Volatility Score Even in quiet markets, there are always plenty of high-volatility stocks to trade if you have the right tools to find them. However, traders are not just looking for high volatility, but are instead looking for stocks that have the highest volatility relative to their price. In other words, if two stocks have the same daily average true range value, but one stock is $20 a share and the other is $40 a share, the $20 stock offers a potentially better trading value, with more volatility for each dollar invested. Calculations based on asset type: Stocks:

Volatility Score = (Average True Range1 / Close) x 2000

3

Futures: Volatility Score = ((Average True Range

1 / BigPointValue) / Margin

2) x 100

3

Forex: Volatility Score = (Average True Range

1 / Margin in U.S. Dollars

2) x 100

3

TrueRange = Greater of (Current Bar High or Previous Bar Close) minus

Lesser of (Current Bar Low or Previous Bar Close)

1 A 21-bar average of TrueRange is used expressed in PIPS for Futures and Forex.

2 Futures Margins are derived from the TradeStation website. Forex margins are based on a 20 to 1 basis.

3 2000 is a normalization factor for stocks, 100 is a normalization for Futures and Forex.

Volatility Score Indicator: This custom indicator plots the volatility score calculation on any symbol at any bar interval. It can be used in Charting, RadarScreen, and Scanner. Note: Cannot be used in Scanner on Futures symbols. Plot1: Volatility Score Inputs:

ATRLength (8) - Bars to lookback for the ATR average. FirstRSRow(2) - Species the first symbol row in RadarScreen that will be used.

Charting the Volatility Score Indicator In the daily charts below, we can see SPY (S&P 500) and MSFT (Microsoft) side by side with the standard Average True Range indicator that comes with TradeStation. Generally, a $100+ stock like SPY is going to have a higher Average True Range value than a $30 stock like MSFT. But when looking to trade symbols with the greatest movement potential, what we want to compare is the higher relative volatility, weighted by cost or margin, using this Volatility Score idea.

In the charts above is the custom Volatility Score indicator, which calculates average true range and divides it by a comparable price value of the symbol. You can see that MSFT has a higher Volatility Score relative to SPY, giving MSFT the higher volatility movement potential based on an equal amount invested. Of course, the Volatility Score indicator does not give you a market direction or bias; but what you now have is a tool to measure the price-weighted volatility potential for any stock or other symbol relative to other symbols of the same type (stocks to stocks). Do not try to compare scores across asset types (e.g., stocks to futures); stocks, futures, and forex all use different calculations for the comparative price (see the previous page). With this indicator, you can scan and rank a universe of symbols to find those symbols with the highest Volatility Score/Value potential. The time frame/interval of the chart determines the Volatility Score/Value potential for that time frame, and should be based on the time horizon of your trading. Short-term traders can use 1- to 15-minute charts, swing traders can use 15-minute to daily intervals and long-term traders can use weekly or monthly intervals. The score comparisons can be very different based on the time frame.

Volatility Score Indicator in RadarScreen

Sort on the indicator column heading in order to sort and rank the symbols by the volatility score. Note: These tools were created in TradeStation 9.1 (12880)(U29), and are compatible with TradeStation 9.5.