[SGM GARCH Volatility]

12 jun

I'm excited to share with you a Pine Script™ that I developed to analyze GARCH (Generalized Autoregressive Conditional Heteroskedasticity) volatility. This script allows you to calculate and plot GARCH volatility on TradingView. Let's see together how it works!

Introduction

Volatility is a key concept in finance that measures the variation in prices of a financial asset. The GARCH model is a statistical method that predicts future volatility based on past volatilities and prediction residuals (errors).

Indicator settings
We define several parameters for our indicator:

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length: The period used for the calculations, default 20.
p: The order of the delay for the GARCH model.
q: The degree of the moving average for the GARCH model.
cluster_value: A threshold value used to color the graph.

Calculation of logarithmic returns
We calculate logarithmic returns to capture price changes:

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Initializing arrays
We initialize arrays to store residuals and volatilities:

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We add the new logarithmic returns to the tables and keep their size constant:

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We then calculate the mean and variance of the residuals:

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We update the volatility table with the new value:

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GARCH volatility is calculated from accumulated data:

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Plot GARCH volatility

We finally plot the GARCH volatility on the chart and add horizontal lines for easier visual analysis:

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colorGarch: Determines the fill color based on the comparison between garchVolatility and cluster_value.


Using the script in your trading

Incorporating this Pine Script™ into your trading strategy can provide you with a better understanding of market volatility and help you make more informed decisions. Here are some ways to use this script:

Identification of periods of high volatility:

When the GARCH volatility is greater than the cluster value (cluster_value), it indicates a period of high volatility. Traders can use this information to avoid taking large positions or to adjust their risk management strategies.

Anticipation of price movements:

An increase in volatility can often precede significant price movements. By monitoring GARCH volatility spikes, traders can prepare for potential market reversals or accelerations.

Optimization of entry and exit points:

By using GARCH volatility, traders can better identify favorable times to enter or exit a position. For example, entering a position when volatility begins to decrease after a peak can be an effective strategy.

Adjustment of stops and objectives:

Since volatility is an indicator of the magnitude of price fluctuations, traders can adjust their stop-loss and take-profit orders accordingly. Periods of high volatility may require wider stops to avoid being exited from a position prematurely.


That's it for the detailed explanation of this Pine Script™ script. Don’t hesitate to use it, adapt it to your needs and share your feedback! Happy analysis and trading everyone!