The volatility ratio by Jack Schwager expresses the latest day’s trading range as a ratio of the overall range for a past N days. “True range” is used for both (see True Range), so gaps are included in the calculation.
For an N-day true range the close immediately preceding those N days is incorporated. Thus
TR Ndays = max(high, high, ... high[N], close[N+1]) - min(low, low, ... low[N], close[N+1])
The volatility ratio is then simply
TR VOLR = -------- TR Ndays
When a strong breakout from a tight range occurs the day’s range can be a sizeable fraction of the recent range. A level of 0.5 is considered significant and that’s drawn as a line in Chart.
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