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The September 1998 article “Trading
The Trend” by Andrew Abraham, in
which he presented a volatility indicator,
doesn’t provide the information
necessary for the educated layman who
is interested in technical analysis. In
my opinion, it should have provided
more detail on some areas.
I understand the calculation of a 21-
period weighted average of the true
range, but why is the final value multiplied
by 3? Is the volatility indicator in
a rising market calculated by subtracting
the 21-period weighted average of
the true range from the highest close in
the same 21-period?
Then when the market closes below
the volatility indicator, is the volatility
indicator calculated by adding the next
day’s value of the 21-period weighted
average of the true range to the lowest
close in the 21 periods? I hope you can
clarify this for me.
TONY RAMSELAAR, via E-mail
Weert, The Netherlands
The volatility indicator discussed by
Abraham in the article was originally
introduced by J. Welles Wilder in New
Concepts In Technical Trading, published
by Trend Research in 1978, available
from the Delta Society (336 698-
0500). Wilder explains that the constant
used in the volatility system can
range from 2.80 to 3.10 and was found
by testing. The volatility indicator is a
trailing stop-and-reverse approach.
The volatility indicator is the average
true range multiplied by the constant
and subtracted from the highest close
for long positions. Thus, if you are
long, you should go short if the market closes below the volatility indicator.
While you are short, the volatility indicator
is added to the lowest close, and
you go long if the market closes above
the volatility indicator.
I hope this helps to fill in the gaps for