V.17:5: Letters

LETTERS TO S&C

The editors of S&C invite readers to submit their opinions and information on subjects relating to technical analysis and this magazine. This column is our means of communication with our readers. Is there something you would like to know more (or less) about? Have you run across trading techniques, services or products that have proved useful? Tell us about it. Without a source of new ideas and subjects coming from our readers, this magazine would not exist.

Address your correspondence to: Editor, STOCKS & COMMODITIES, 4757 California Ave. SW, Seattle, WA 98116-4499, or E-mail to editor@traders.com. Letters published may be edited for length or clarity. The opinions expressed in this column do not necessarily represent those of the magazine.—Editor

VOLATILITY INDICATOR

Editor,

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 you.—Editor