Van Tharp's Market Volatility

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Van Tharp's Market Volatility

Postby rjay » Wed May 13, 2015 3:06 pm

I'm trying to code Van Tharp's Market Volatility formula which he discusses here:

I understand the first bit "I take the 20-day ATR and divide that by the closing price for the index each day."

(symbol(GSPC, atr(20)) / c)

He then refers to that as a percentage ("I used data going back about 50 years and found out that the mean ATR % doesn’t change that much from decade to decade"), so maybe it should be

(symbol(GSPC, atr(20)) / c) * 100

But then he completely loses me when he talks about StDev. Can anyone tell me how to finish this ?
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Re: Van Tharp's Market Volatility

Postby Overload » Thu May 14, 2015 10:04 am

I agree that the daily calculation is probably this:

(symbol(GSPC, atr(20)) / c) * 100

The above has a mean of about 1.3 over time, so that appears to match his description. He also provides the standard deviation of 0.72, which is important because it creates the distinct levels of volatility:

Very Volatile: Mean + (3 * 0.72) = 2.78
Volatile: Mean + (0.5 * 0.72) = 1.08
Normal: Mean +- (0.5 * 0.72) = 0.36 to 1.08
Quiet: Mean - (0.5 * 0.72) = 0.36

To put this into a custom formula named VMTCS, you could use:

vol = (symbol(GSPC, atr(20)) / c) * 100;
t = 0;
t = if(vol > 0.36, t+1, t);
t = if(vol > 1.08, t+1, t);
t = if(vol > 2.78, t+1, t);
VMTCS = t;

The VMTCS will range from 0 to 3 based on the current state of volatility, with 0 being Quiet and 3 being Very Volatile.

I believe that is correct, but displaying it on a chart shows it hasn't been Quiet or Normal since 1961. It's only been Volatile or Very Volatile since then, which could be true but makes it pretty limited. I'm thinking either adjusting the mean standard deviation of 0.72, or adjusting the number of standard deviations for each level might help create a more useful range.

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Re: Van Tharp's Market Volatility

Postby rjay » Thu May 14, 2015 11:39 am

That's great, thanks a lot.
Posts: 116
Joined: Wed Jul 26, 2006 6:51 am

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