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8.18 Variable Index Dynamic Average

The variable index dynamic average (VIDYA) by Tushar Chande and Stanley Kroll (in their book The New Technical Trader, 1984) is an exponential style moving average (see Exponential Moving Average) with a smoothing that varies according to recent price volatility.

A volatility measure is obtained by taking the standard deviation (stddev, see Standard Deviation) of the past 9 days closing prices, expressed as a fraction of a longer stddev of 30 days. A scaling factor of 0.2 produces an alpha usually in the range of about 0.3 to 0.1, corresponding to EMA periods of about 5 to 20 days.

              stddev[short] of closing prices
alpha = 0.2 * -------------------------------
              stddev[long] of closing prices

An exponential moving average of prices is then formed in the usual way, with each day’s alpha.

VIDYA = alpha * close + (1-alpha) * VIDYA[prev]

The alpha values can be viewed directly with “VIDYA alpha” in the lower indicator window, under “Low Priority” in the indicator lists. High values show where the VIDYA is tracking recent prices closely, low values show where it’s responding only slowly.

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