Thank you Mr Tools.
However, I am thinking of something like Wells Wilder's index, where he would compare the volatility of a security with the volatility of an index like the DJIA. If we are comparing the price of one security (present) with the price for the same security (past) there is no way to know if the volatility of that security is higher than the volatility of a different security, because they are being measured against themselves. Therefore this tool cannot be used to screen for high/low volatility instruments, only for high/low volatility periods in the past history of a single security.
Has this work been done, do you know? If not, maybe it will be an interesting challenge for someone to complete. The ability to screen for high volatility issues in a time of relatively low volatility in Forex, would be a great boon.
If it is helpful here are some notes from Grafton about how Wilder completed his calculation for a true RVI.
Get the True Range:
The absolute difference between the current bar high and the current bar low –
ABS {H(0) – L(0)}
The absolute difference between the previous bar close and the current bar high –
ABS {C(1) – H(0)}
The absolute difference between the previous bar close and the current bar low
ABS {C(1) – L(0)}
Wilder’s Volatility Index is then calculated as ATR (0) using the previous bar’s
volatility index ATR (1) and the current bar’s True Range TR (0) over an (arbitrary) 14-bar look-
back period. The calculation is:
ATR (0) = 13 * ATR (1) + TR (0) / 14
The last step in the Volatility Index / ATR calculation is to divide the security’s ATR
by the ATR of an index. The calculation for the ATR of the index is exactly the same
as that of the security, but of course it uses the index price values instead. This
gives a measure of relative volatility which allows comparison between active and less active securities.
To do this one final adjustment needs to be made to ATR.
Because True Range is expressed in price points we need to normalize it by converting into percentage terms.
One method to do this is to divide the 14-period ATR value by a 14-period simple moving average.
RV = (ATRSec (14) / SMASec (14)) / (ATRInd (14) / SMAInd (14))
Where the calculation period for each component is 14 bars, ATRSec and SMASec are the ATR and the SMA of the security; and ATRInd and SMAInd are the ATR and SMA of the index respectively.
