Traders Tips - Technical Analysis, Inc.
In "Historical volatility and pattern recognition," Laurence Connors and Linda Bradford Raschke combine a historical volatility ratio with some short-term patterns to spot potential price moves. Here's a set of
TechniFilter Plus formulas that will filter for these situations.
Formula 1 is the historical price volatility ratio. It compares the five-day standard deviation of the logarithm of the one-day price change ratio to the 99-day version of the same calculation. Connors and Raschke suggest using six-day and 100-day periods, but TechniFilter Plus uses five and 99 in its standard deviation calculation to reproduce the same values (since 100 days yield 99 one-day changes). Formula 2 is 1 if today is an inside day and zero otherwise. Formula 3 is 1 if today is an NR4 day (narrow range 4 pattern) and zero otherwise. Formula 4 is 1 if the volatility ratio is less than 0.5 and today is either an inside day or an NR4 day. Thus, a 1 in column 4 marks the days when a market move is expected according to this strategy.