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Welles Wilder Jr introduced in his book 'New Concepts in Technical Trading Systems' several trading indicators including the Relative Strength Index (RSI), parabolic stops and the Average Directional Index (ADX).
He also introduced an indicator, based on the True Range (TR), which estimates the volatility of an asset or market volatility. The indicator is the Wilders Volatility Index.
The Wilders Volatility Index is also called Average True Range or ATR (Available in QuantShare under "ATR" name). The difference is that this indicator allows you to specify a constant value used in the internal calculation of this volatility measure.
The Wilders Volatility Index uses the true range (TRange), which is the highest of the following distances:
Distance between current high and previous low
Distance between current high and previous close
Distance between current low and previous close
The True Range is useful to avoid some errors in volatility estimation. Example: A stock with a low trading range, the daily high is near the daily low, is considered as a stock with low volatility. However, this is not the case when the daily high or low is far from the previous trading day's close.
The Wilders Volatility Index allows you to specify two parameters. The first is the period and is used to calculate the average true range values over the specified number of previous bars. The second parameter is a constant and it is used to multiply the previous values of the volatility index.
The default implementation of the Average True Range doesn't allow you to specify the constant parameter. It uses a default constant value of 13.
Trading financial instruments, including foreign exchange on margin, carries a high level of risk and is not suitable for all investors. The high degree of leverage can work against you as well as for you. Before deciding to invest in financial instruments or foreign exchange you should carefully consider your investment objectives, level of experience, and risk appetite. The possibility exists that you could sustain a loss of some or all of your initial investment and therefore you should not invest money that you cannot afford to lose. You should be aware of all the risks associated with trading and seek advice from an independent financial advisor if you have any doubts.
