Overview
This indicator calculates and plots the historical volatility of a stock, which is a measure of the stock's price fluctuation over a specific period. The volatility is computed using the standard deviation of the logarithmic returns (log returns) of the stock's closing prices. It is then annualized and displayed as a percentage on the chart.
Additionally, the log return values are printed above each candlestick (or every fifth bar, to reduce clutter). This can help traders observe the daily price changes in a logarithmic scale, providing insights into the magnitude and direction of the price movements.
Key Components
Logarithmic Returns: Log returns represent the percentage change in price, accounting for compounding, and are calculated using the formula log(close / close[1]).
Historical Volatility: This is calculated by taking the standard deviation of log returns over a specified period and annualizing it. This metric gives an estimate of the stock’s volatility, similar to how the VIX measures volatility in the options market.
Annualization: Volatility is annualized by multiplying by the square root of 252 (the approximate number of trading days in a year), providing a volatility percentage in annual terms.
How to Use
Volatility Levels: Higher volatility indicates larger price swings and potentially higher risk, while lower volatility suggests more stable price movements.
Log Return Display: Use the displayed log return values to see how much the price has changed from one day to the next in percentage terms. The log returns offer a normalized view of price changes, which can be useful for identifying trends or patterns.
Applications
Risk Management: This indicator helps in assessing the riskiness of a stock based on its price volatility. Traders can adjust position sizes and risk management strategies accordingly.
Trend Analysis: By observing periods of high and low volatility, traders can identify potential breakout or reversal points. High volatility often follows periods of consolidation.