TASC 2019-01 | The V-Trade Part 5 (Vervoort)

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Traders' Tip text

Don’t be confused by the SveVolatilityBands name: the new bands by author Sylvain Vervoort are different from the synonymous indicator from his August 2013 article in Traders’ Tips.

We decided that a good illustration of its application may be through the concept of volatility contraction and expansion. Price breakout following a volatility contraction implies an expansion in volatility of the price range which acts as catalyst to longer term trends. The opposite phase, i.e. when the bands volatility reaches its long-term high, signifies considerable price changes and a potential end of the trend. The width percentage of the Smoothed Volatility Bands is measured over desired lookback (here: 200 days).

System rules:

Buy at stop at the highest 20-day high when the percent width of the SveVolatilityBands contracts to its lowest 200-day value, and there’s a bullish trend (close price above 200-day SMA)
Sell at market when the percent width of the SveVolatilityBands widens to its highest 200-day value, and today’s low drops below the 20-day lowest low

The system may be risky enough to apply in its current barebone state so motivated traders might want to use a stop loss and/or a trend filter to liquidate position if the trend has changed from bullish.

Figure 1. demonstrates the characteristic volatility expansion trade in AAPL (Apple Inc).


using System;
using System.Collections.Generic;
using System.Text;
using System.Drawing;
using WealthLab;
using WealthLab.Indicators;
using TASCIndicators;

namespace WealthLab.Strategies
{
	public class SVESmoothedVolatilityBands : WealthScript
	{
		private StrategyParameter paramBandAvg;
		private StrategyParameter paramMiddleLine;
		private StrategyParameter paramDevFact;
		private StrategyParameter paramLowBAdj;
		private StrategyParameter paramSqueezeLookback;

		public SVESmoothedVolatilityBands()
		{
			paramBandAvg = CreateParameter("Band average", 20, 2, 100, 1);
			paramMiddleLine = CreateParameter("Middle line period", 20, 2, 100, 1);
			paramDevFact = CreateParameter("Deviation factor", 2.4, 0.2, 5.0, 0.2);
			paramLowBAdj = CreateParameter("Low Band Adj.", 0.9, 0.1, 3.0, 0.1);
			paramSqueezeLookback = CreateParameter("Squeeze lookback", 200, 5, 150, 1 );        
		}
		
		protected override void Execute()
		{
			int average = paramBandAvg.ValueInt;
			int middleperiod = paramMiddleLine.ValueInt;
			double devfact = paramDevFact.Value;
			double lowbandadjust = paramLowBAdj.Value;
			int squeezelen = paramSqueezeLookback.ValueInt;

			// Smoothed Volatility Bands
			var TypicalPrice = AveragePriceC.Series( Bars );
			var MedianAverage = WMA.Series(TypicalPrice, middleperiod);
			var HighChannel = SVESmoothedVolatilityBandUpper.Series( Bars, average, middleperiod, devfact, lowbandadjust );
			var LowChannel = SVESmoothedVolatilityBandLower.Series( Bars, average, middleperiod, devfact, lowbandadjust );

			SolidBrush shadowBrush = new SolidBrush(Color.FromArgb(50, Color.Violet));
			PlotSeriesFillBand(PricePane, HighChannel, LowChannel, Color.Blue, shadowBrush, LineStyle.Solid, 2);
			PlotSeries(PricePane, MedianAverage, Color.Blue, LineStyle.Solid, 1);
			HideVolume();

			// Squeeze and expansion in SveVolatilityBands
			var PctWidth = ( ( HighChannel - LowChannel ) / MedianAverage ) * 100; PctWidth.Description = "% Width";
			var PctWidthMax = Highest.Series( PctWidth, squeezelen );
			var PctWidthMin = Lowest.Series( PctWidth, squeezelen );
			
			ChartPane PctWPane = CreatePane( 20, true, true );
			PlotSeries( PctWPane, PctWidth, Color.Blue, WealthLab.LineStyle.Solid, 2 );
			PlotSeries( PctWPane, Lowest.Series( PctWidth, squeezelen ), Color.DarkGreen, LineStyle.Dashed, 2 );
			PlotSeries( PctWPane, Highest.Series( PctWidth, squeezelen ), Color.DarkRed, LineStyle.Dashed, 2 );

			for(int bar = GetTradingLoopStartBar(average); bar < Bars.Count; bar++)
			{
				if (IsLastPositionActive)
				{
					if(	PctWidth[bar] >= PctWidthMax[bar] )
					{
						SetBackgroundColor( bar, Color.FromArgb(30, Color.Red) );
						if( Low[bar] <= Lowest.Series(Low, average)[bar] )
							SellAtMarket(bar+1, LastPosition, "Vola expansion");
					}					
				}
				else
				{
					if(	PctWidth[bar] <= PctWidthMin[bar] )
					{
						SetBackgroundColor( bar, Color.FromArgb(30, Color.Green) );
						if( Close[bar] >= SMA.Series(Close,	squeezelen)[bar] )
							BuyAtStop( bar+1, Highest.Series(High, average)[bar], "Vola contraction" );
					}
				}	
			}
		}
	}
}

Eugene (Gene Geren)
Wealth-Lab team
www.wealth-lab.com