VEI - Volatility Expansion Index
Coder: Prabuddha-Peramuna
Date: Dec. 2025
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Most traders think a market is āstableā when price looks smooth. In reality, stability has nothing to do with how price looks itās a volatility pattern, not a price pattern.
Hereās the simple mechanism my algos use to detect when the market is shifting from stable ā unstable long before most traders notice.
The Core Idea: Compare Fast Volatility vs. Slow Volatility
I calculate two ATRs:
- ATR(short) ā fast volatility (current reactions)
- ATR(long) ā baseline volatility (normal behavior)
Then I compare them:
VEI = ATR(short) / ATR****(long)
Volatility Expansion Index
Itās shockingly simple but it reveals the hidden character of the market.
How to Read VEI (The Three Volatility States)
Most indicators try to predict direction. VEI does something more important:
It tells you whether the environment is favorable for your strategy.
Hereās how it behaves:
VEI < 1.0 ā Stable / Normal
This is where most systematic strategies perform best.
VEI > 1.2 ā Volatility Expansion (Unstable)
Short-term volatility is 20% higher than the marketās normal baseline.
This is where you see:
- Fakeouts and broken structure
- Stops getting hit more often
- Random wicks and slippage
This is the zone where undisciplined traders lose money fast.
When VEI pushes above 1.2, my systems automatically:
- Avoid trend continuations
Volatility shifts before direction shifts and VEI catches it early.
VEI < 1.0 and Decreasing ā Controlled & Structured
This is the most cooperative market condition:
If youāre a trend or pullback trader, this regime is gold.
What VEI Is (and Isnāt)
VEI IS
- A market stability filter
- A classifier for stable vs unstable regimes
- A way to know when conditions are favorable for your strategy
VEI IS NOT
VEI doesnāt tell you where to enter. It tells you whether entering makes sense in the first place.
Best Settings for VEI
After testing across Forex, Crypto, Indices, and Futures, these are the most reliable universal settings:
- ATR Short = 10 (captures current behavior)
- ATR Long = 50 (captures marketās baseline state)
This contrast gives you a clean view of volatility regime shifts without overreacting to noise.
How You Can Use VEI (No Algo Required)
- Add ATR(10) and ATR(50) to your chart
- Create the ratio: VEI = ATR(short) Ć· ATR(long)
VEI > 1.2 ā trade smaller or skip setups
VEI < 1.0 ā stable environment, trend setups cleaner
This one filter alone can remove a shocking number of unnecessary losses.
DOWNLOAD:
2026FEB_b.pdf
