Realized volatility differential

22 Mar

About
This is a simple indicator that takes into account two types of realized volatility: Close-Close and High-Low (the latter is more useful for intraday trading).

The output of the indicator is two values / plots:

• an average of High-Low volatility minus Close-Close volatility (10day period is used as a default)
  
• the current value of the indicator
  

When the current value is:

• lower / below the average, then it means that High-Low volatility should increase.
  
• higher / above then obviously the opposite is true.
  

How to use it
It might be used as a timing tool for mean reversion strategies = when your primary strategy says a market is in mean reversion mode, you could use it as a signal for opening a position.
For example: let's say a security is in uptrend and approaching an important level (important to you).
If the current value is:

• above the average, a short position can be opened, as High-Low volatility should decrease;
  
• below the average, a trend should continue.
  

Intended securities
Futures contracts