Volatility Ratio Indicator MT4 | MT5

The Volatility Ratio Indicator falls under the volume category of technical analysis indicators designed to assess market volatility by comparing recent price fluctuations to historical price movements. 

VR = Current Period's ATR / N-Period ATR MA

where; * Current Period's ATR: The Average True Range value for the most recent period.

            * N-Period ATR MA: The moving average of ATR over a longer period.

Furthermore, the VR indicator helps traders identify periods of high or low volatility:

- When VR>1 (Green VR's line), high volatility, suggests potential breakouts or strong trend momentum.

- When VR<1 (Red VR's line), low volatility, indicates consolidation market activity.

With these readings, this indicator can be used for various trading strategies:

• Trend confirmation:

- If the ratio remains above 1 during an upward or downward trend, it confirms strong market momentum.

• Range-Bound Trading:

- When the indicator remains low for an extended period confirming a sideways trend, allowing traders to focus on this strategy like buying near support and selling near resistance.  

• Breakout Trading:

- A sudden rise in the volatility ratio after a consolidation price action may signal a potential trend reversal or a trend continuation depending on the price moves.

The VR indicator should be combined with MAs or Support&Resistance indicators to confirm trading signals and improve accuracy. 

1. In the AUDCAD chart example on MetaTrader 5, during the upward trend, the indicator enters the low volatility zone, suggesting a consolidation price action. When the VR crosses above the 1 level alongside a bullish candle, confirming the continuation of the bullish momentum, signaling a strong buying opportunity. 

2. In the GBPUSD chart example on MetaTrader 4, toward the end of the uptrend, the indicator enters the low volatility zone, suggesting an indecision phase for the trader. As the VR breaks above the 1 level alongside a bearish candle, signaling a bearish reversal and a short opportunity for the trader.

3. In the EURJPY chart example on MetaTrader 5, during the downtrend, the VR's line drops below the 1 level suggesting a sideways market. The indicator remains low for an extended period, signaling a range-bound opportunity. Traders could buy near the support and sell near the resistance levels during this period. But, when the green line reappears, suggesting a high volatility market. And when a bearish candle appears, that signals the continuation of the main downtrend.