Base Volatility Indicator MT4 | MT5

The Base Volatility (BV) is a technical analysis indicator that provides a refined measure of market volatility by combining smoothed standard deviation with layered moving averages. The indicator is plotted in a separate window as a single line (Violet) and reacts to price fluctuations with a smooth visual output.

1- A Moving Average (XMA1) is calculated over the selected price.

2- A Standard Deviation (STD) is computed between the price and the first moving average. This standard deviation is then smoothed again using a second moving average (XMA2), resulting in the final volatility line.

Moreover, the BV helps traders with several trading strategies, such as: 

• Volatility Breakout Strategy:

- A sharp rise in the Base Volatility line indicates increasing market activity.

- Consider entering a breakout or momentum trade in the direction of the prevailing price move once volatility spikes.

• Reversal Strategy:

- A declining or flat volatility line suggests quiet market conditions.

- Look for reversal or range-bound setups (buy low/sell high) during such quiet phases.

• Trend Strength:

- If Volatility is rising, it adds confirmation to the trend direction.

- If volatility is low falling, it may signal a weak or unreliable trend.

• Divergence Signal:

- If the price makes new highs or lows but volatility does not increase, it suggests a weakening move or false breakout.

1/ In the EURUSD chart example, the MT4 version of the Base Volatility Indicator confirmed the downtrend by displaying a rise in volatility. This uptick in volatility aligned with the continuation of bearish momentum, signaling a short opportunity. As the price continued to form lower lows, the indicator began to show a decline in volatility, an early indication of potential bullish divergence.

In such a scenario, traders should consider closing short positions and remain on the sidelines until a clear reversal signal emerges. When the price eventually breaks above a previous resistance level, accompanied by a spike in volatility as shown in the indicator window, it confirms a shift in market sentiment toward bullishness. This provides traders with a valid setup to enter long positions, with targets set near the highs of the preceding downtrend. 

2/ In the GBPJPY chart example, the MT5 version of the Base Volatility Indicator confirmed the uptrend by displaying a rise in volatility. This uptick in volatility aligned with the continuation of bullish momentum, signaling a long opportunity. As the price continued to make higher highs, the indicator began to show a decline in volatility, an early indication of potential bearish divergence.

In such a scenario, traders should consider closing buying trades and remain on the sidelines until a clear reversal signal emerges. When the price eventually breaks below a previous support level, accompanied by a spike in volatility as illustrated in the indicator window, it confirms a shift in market sentiment toward bearishness. This provides traders with a valid setup to enter short positions, with targets set near the lows of the preceding uptrend.