Custom Formula Collection

With MetaStock^TM for Windows, you can easily plot the 10 and 100 day Historical Volatility. First use the Indicator Builder to enter the following Custom indicators:

Historical Volatility 10 day
Std(Log(C/Ref(C,-1)),10)*Sqrt(365)*100

Historical Volatility 100 day
Std(Log(C/Ref(C,-1)),100)*Sqrt(365)*100

Next plot both indicators in the same inner window. If the Scaling Options dialog appears, choose the Merge with Scale on Right (or left) option.

I find it easier to see the Historical Volatility signals by combining the 10 and 100 day indicators into the following indicator.

Historical Volatility Indicator
Std(Log(C/Ref(C,-1)),10)/Std(Log(C/Ref(C,-1)),100)

Plot this indicator in MetaStock for Windows, then click your mouse button on the indicator. Choose Historical Volatility Indicator Properties and then choose the Horizontal Lines page. Add a horizontal line at .5 and then choose the OK button. You now know the 10 period volatility is less than half the 100 period volatility anytime this indicator crosses below its horizontal line.

To test trading systems using this indicator it would he helpful to use the alert function along with a trend following indicator, such as the following example:

• Enter Long:
  Cross(CLOSE,Mov(C,20,E)) AND Alert(Fml("Historical Volatility Indicator")<=5,10)
   
• Enter Short:
  Cross(Mov(C,20,E),CLOSE) AND Alert(Fml("Historical Volatility Indicator")<=5,10)

This system will enter a long trade when the close has crossed above its 20 day moving average, and when Historical Volatility Indicator was .5 or lower within the last 10 days. The system will sell when the close crosses below its 20 day moving average, and when Historical Volatility Indicator was .5 or lower within the last 10 days. Use any indicator you would like, this just provides a basic example of how to use this indicator in a system test.