August 2010

eSIGNAL: NORMALIZED VOLATILITY INDICATOR

For this month’s Traders’ Tip, we’ve provided two formulas, “Kayakkal_NVI.efs” and “Kayakkal_NVI_Strategy.efs,” based on the formula code given in Rajesh Kayakkal’s article in this issue, “Normalized Volatility Indicator.”

The studies contain formula parameters to set the Length and X parameters, which may be configured through the Edit Studies window (Advanced Chart menu → Edit Studies). The Kayakkal_NVI.efs study simply plots the Nvi. The Kayakkal_NVI_Strategy formula is configured for backtesting and contains one additional formula parameter for the strategy Lot Size.

A sample chart is shown in Figure 2.

Figure 2: eSIGNAL, Normalized Volatility Indicator

Kayakkal_NVI.efs

/*********************************
Provided By:
eSignal (Copyright c eSignal), a division of Interactive Data
Corporation. 2010. All rights reserved. This sample eSignal
Formula Script (EFS) is for educational purposes only and
may be modified and saved under a new file name. eSignal
is not responsible for the functionality once modified. eSignal
reserves the right to modify and overwrite this EFS file with
each new release.

Description:        
    Normalized volatility indicator 
    
Version:            1.00  06/07/2010

Formula Parameters:                     Default:
    
Notes:
    The related article is copyrighted material. If you are not a 
    subscriber of Stocks & Commodities, please visit www.traders.com.

**********************************/
var fpArray = new Array();
var bInit = false;
var bVersion = null;

function preMain() {
    setPriceStudy(false);
    setShowCursorLabel(true);
    setShowTitleParameters(false);
    setStudyTitle("NVI");
    setCursorLabelName("NVI", 0);
    setDefaultBarFgColor(Color.blue, 0);
    setPlotType(PLOTTYPE_LINE, 0);
    setDefaultBarThickness(2, 0);
    var x=0;
    fpArray[x] = new FunctionParameter("Length", FunctionParameter.NUMBER);
	with(fpArray[x++]){
        setName("Length");
        setLowerLimit(1);
        setDefault(64);
    }    
    fpArray[x] = new FunctionParameter("X", FunctionParameter.NUMBER);
	with(fpArray[x++]){
        setName("X");
        setDefault(1);
    }        
}

var xNVI = null;

function main(Length, X) {
var nBarState = getBarState();
var nNVI = 0;
    if (bVersion == null) bVersion = verify();
    if (bVersion == false) return;   
    if (nBarState == BARSTATE_ALLBARS) {
        if (Length == null) Length = 64;
        if (X == null) X = 1;
    }    
    if (!bInit) { 
        xNVI = efsInternal("Calc_NVI", Length);
        addBand(0, PS_SOLID, 1, Color.lightgrey, "Zero");
        addBand(X, PS_SOLID, 1, Color.red, "X");
        bInit = true; 
    }
    nNVI = xNVI.getValue(0);
    if (nNVI == null) return;
    return nNVI;
}

var bSecondInit = false;
var xClose = null;
var xATR = null;

function Calc_NVI(Length) {
var nRes = 0;
var nClose = 0;
var nATR = 0;
    if (!bSecondInit) {
        xClose = close();
        xATR = atr(Length);
        bSecondInit = true;
    }
    nClose = xClose.getValue(0);
    nATR = xATR.getValue(0);
    if (nATR == null) return;
    nRes = nATR / nClose * 100;
    return nRes;
}

function verify() {
    var b = false;
    if (getBuildNumber() < 779) {
        drawTextAbsolute(5, 35, "This study requires version 8.0 or later.", 
            Color.white, Color.blue, Text.RELATIVETOBOTTOM|Text.RELATIVETOLEFT|Text.BOLD|Text.LEFT,
            null, 13, "error");
        drawTextAbsolute(5, 20, "Click HERE to upgrade.@URL=https://www.esignal.com/download/default.asp", 
            Color.white, Color.blue, Text.RELATIVETOBOTTOM|Text.RELATIVETOLEFT|Text.BOLD|Text.LEFT,
            null, 13, "upgrade");
        return b;
    } else {
        b = true;
    }
    return b;
}


Kayakkal_NVI_Strategy.efs

/*********************************
Provided By:
eSignal (Copyright c eSignal), a division of Interactive Data
Corporation. 2010. All rights reserved. This sample eSignal
Formula Script (EFS) is for educational purposes only and
may be modified and saved under a new file name. eSignal
is not responsible for the functionality once modified. eSignal
reserves the right to modify and overwrite this EFS file with
each new release.

Description:        
    Normalized volatility indicator  Strategy
    
Version:            1.00  06/07/2010

Formula Parameters:                     Default:
    
Notes:
    The related article is copyrighted material. If you are not a
    subscriber of Stocks & Commodities, please visit www.traders.com.
**********************************/
var fpArray = new Array();
var bInit = false;
var bVersion = null;

function preMain() {
    setPriceStudy(false);
    setShowCursorLabel(true);
    setShowTitleParameters(false);
    setStudyTitle("NVI Strategy");
    setCursorLabelName("NVI", 0);
    setDefaultBarFgColor(Color.blue, 0);
    setPlotType(PLOTTYPE_LINE, 0);
    setDefaultBarThickness(2, 0);
    var x=0;
    fpArray[x] = new FunctionParameter("Length", FunctionParameter.NUMBER);
	with(fpArray[x++]){
        setName("Length");
        setLowerLimit(1);
        setDefault(64);
    }    
    fpArray[x] = new FunctionParameter("X", FunctionParameter.NUMBER);
	with(fpArray[x++]){
        setName("X");
        setDefault(1);
    }        
    fpArray[x] = new FunctionParameter("LotSize", FunctionParameter.NUMBER);
	with(fpArray[x++]){
        setName("Lot Size");
        setDefault(1);
    }            
}

var xNVI = null;

function main(Length, X, LotSize) {
var nBarState = getBarState();
var nNVI = 0;
    if (bVersion == null) bVersion = verify();
    if (bVersion == false) return;   
    if (getCurrentBarIndex() == 0) return;        
    if (nBarState == BARSTATE_ALLBARS) {
        if (Length == null) Length = 64;
        if (X == null) X = 1;
        if (LotSize == null) LotSize = 1;
    }    
    if (!bInit) { 
        xNVI = efsInternal("Calc_NVI", Length);
        addBand(0, PS_SOLID, 1, Color.lightgrey, "Zero");
        addBand(X, PS_SOLID, 1, Color.red, "X");
        bInit = true; 
    }
    nNVI = xNVI.getValue(0);
    if (nNVI == null) return;
    if (nNVI < X) {
        if (Strategy.isShort()) {
            Strategy.doCover("Exit Short", Strategy.MARKET, Strategy.NEXTBAR, Strategy.ALL);
        }
        Strategy.doLong("Long", Strategy.MARKET, Strategy.NEXTBAR, LotSize);
    }
    if (nNVI > X) {
        if (Strategy.isLong()) {
            Strategy.doSell("Exit Long", Strategy.MARKET, Strategy.NEXTBAR, Strategy.ALL);
        }
        Strategy.doShort("Short", Strategy.MARKET, Strategy.NEXTBAR, LotSize);
    }
  	if(Strategy.isLong()) {
        setBarBgColor(Color.lime, 0, 0, 10);
    } else {
        if(Strategy.isShort()) {
            setBarBgColor(Color.red, 0, 0, 10);
        } else {
            setBarBgColor(Color.white, 0, 0, 10); 
        }        
    }            
    return nNVI;
}

var bSecondInit = false;
var xClose = null;
var xATR = null;

function Calc_NVI(Length) {
var nRes = 0;
var nClose = 0;
var nATR = 0;
    if (!bSecondInit) {
        xClose = close();
        xATR = atr(Length);
        bSecondInit = true;
    }
    nClose = xClose.getValue(0);
    nATR = xATR.getValue(0);
    if (nATR == null) return;
    nRes = nATR / nClose * 100;
    return nRes;
}

function verify() {
    var b = false;
    if (getBuildNumber() < 779) {
        drawTextAbsolute(5, 35, "This study requires version 8.0 or later.", 
            Color.white, Color.blue, Text.RELATIVETOBOTTOM|Text.RELATIVETOLEFT|Text.BOLD|Text.LEFT,
            null, 13, "error");
        drawTextAbsolute(5, 20, "Click HERE to upgrade.@URL=https://www.esignal.com/download/default.asp", 
            Color.white, Color.blue, Text.RELATIVETOBOTTOM|Text.RELATIVETOLEFT|Text.BOLD|Text.LEFT,
            null, 13, "upgrade");
        return b;
    } else {
        b = true;
    }
    return b;
}

To discuss this study or download complete copies of the formula code, please visit the Efs Library Discussion Board forum under the Forums link at www.esignalcentral.com or visit our Efs KnowledgeBase at www.esignalcentral.com/support/kb/efs/. The eSignal formula scripts (Efs) are also available for copying and pasting from the Stocks & Commodities website at Traders.com.

—Jason Keck
eSignal, a division of Interactive Data Corp.
800 815-8256, www.esignalcentral.com

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WEALTH-LAB: NORMALIZED VOLATILITY INDICATOR

The normalized volatility indicator presented in Rajesh Kayakkal’s article in this issue by the same name can be found in Wealth-Lab’s Standard Indicators set as “Atrp.”

Using some artistic license with the strategy, I used an Ema-smoothed version of Atrp to avoid whipsaw trades around the trigger level. By detecting the next market structure peak (short) or trough (long) and then comparing current price to the previous position’s entry price before adding a new position, the WealthScript strategy adds positions (a fixed-dollar value) only when the market continues to move in your favor.

The strategy should work well for a small set of stocks or exchange traded funds (Etfs); however, it is necessary to find an appropriate trigger level for each issue. For this task, perform a raw-profit optimization on the DataSet. When finished, right-click the Results set and choose the option to “Apply Preferred Values (PVs) based on the highest metric per symbol.” In this way, you can easily recall a symbol’s PV trigger level for testing and trading.

A sample chart is shown in Figure 3.

Figure 3: WEALTH-LAB, Normalized Volatility Indicator. In order to scale into multiple positions only when you’re right, long positions are added on higher troughs, whereas short positions are added after detecting lower peaks.

WealthScript code (C#): 
using System;
using System.Collections.Generic;
using System.Text;
using System.Drawing;
using WealthLab;
using WealthLab.Indicators;

namespace WealthLab.Strategies
{
   public class MyStrategy : WealthScript
   {
      
      StrategyParameter _nviLevel;
      StrategyParameter _atrPeriod;
      StrategyParameter _maxPositions;
      public MyStrategy()
      {
         _nviLevel = CreateParameter("NVI Level", 3.7, 1, 5, 0.1);
         _atrPeriod = CreateParameter("ATR Period", 64, 30, 90, 2);
         _maxPositions = CreateParameter("Max Positions", 5, 1, 10, 1);
      }

      protected override void Execute()
      {   
         double nviTrigger = _nviLevel.Value;
         int maxPositions = _maxPositions.ValueInt;
         int per = _atrPeriod.ValueInt;
         
         DataSeries nvi = EMA.Series( ATRP.Series(Bars, per), 21, EMACalculation.Modern);
         
         ChartPane nviPane = CreatePane(40, true, true);
         PlotSeries(nviPane, nvi, Color.Blue, LineStyle.Solid, 2);
         DrawHorzLine(nviPane, nviTrigger, Color.Fuchsia, LineStyle.Dashed, 2);
            
         for(int bar = Math.Min(3 * per, 64); bar < Bars.Count; bar++)
         {
            if (nvi[bar] > nviTrigger )
            {               
               if ( CrossOver(bar, nvi, nviTrigger) )
               {
                  ExitAtMarket(bar + 1, Position.AllPositions);
                  ShortAtMarket( bar + 1, "Crossover" );
               }
               else if ( CrossUnder(bar, Momentum.Series(Low, 4), 0) )
               {
                  int ap = ActivePositions.Count;
                  if ( ap > 0 && ap < maxPositions)
                  {
                     Position p = LastPosition;
                     if ( bar - p.EntryBar > 5 && Close[bar] < p.EntryPrice )
                        ShortAtMarket( bar + 1, "Add" );
                  }   
               }    
            }
            
            if (nvi[bar] < nviTrigger )
            {               
               if ( CrossUnder(bar, nvi, nviTrigger) )
               {
                  ExitAtMarket(bar + 1, Position.AllPositions);
                  BuyAtMarket( bar + 1, "Crossover" );
               }
               else if ( CrossOver(bar, Momentum.Series(High, 4), 0) )
               {
                  int ap = ActivePositions.Count;
                  if ( ap > 0 && ap < maxPositions)
                  {
                     Position p = LastPosition;
                     if ( bar - p.EntryBar > 5 && Close[bar] > p.EntryPrice )
                        BuyAtMarket( bar + 1, "Add" );
                  }
               }  
            } 
         }
      }
   }
}

—Robert Sucher
www.wealth-lab.com

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NEUROSHELL TRADER: NORMALIZED VOLATILITY INDICATOR

The normalized volatility indicator system described by Rajesh Kayakkal in his article in this issue can be implemented in NeuroShell Trader by combining a few of NeuroShell Trader’s 800+ indicators and NeuroShell Trader’s trading strategy wizard.

To recreate the average true range and Nvi indicator, select “New Indicator” from the Insert menu and use the Indicator Wizard to create the following indicators:

Wilder’s average true range:

ExpAvg( Subtract ( Max2(High, Lag(Close,1)), Min2( Low, Lag(Close,1))), 64 )

NVI:

Multiply2( Divide( WilderAverageTrueRange, Close ), 100 )

To recreate the normalized volatility indicator system, select “New Trading Strategy” from the Insert menu and enter the following in the appropriate locations of the Trading Strategy Wizard:

Generate a buy long market order if all of the following are true:

A<B ( NVI, 1.343 )

Generate a sell short market order if all of the following are true:

A>B ( NVI, 1.343 )

 

If you have NeuroShell Trader Professional, you can also choose whether the Nvi value and true range periods should be optimized. After backtesting the trading strategies, use the “Detailed Analysis” button to view the backtest and trade-by-trade statistics for each strategy.

A sample chart is shown in Figure 5.

Figure 5: NEUROSHELL TRADER, Normalized Volatility Indicator

—Marge Sherald, Ward Systems Group, Inc.
301 662-7950, sales@wardsystems.com
www.neuroshell.com

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AIQ: NORMALIZED VOLATILITY INDICATOR

The Aiq code for Rajesh Kayakkal’s normalized volatility indicator (Nvi) and Nvi trading system based on his article in this issue, “Normalized Volatility Indicator,” is provided here.

I tested the author’s system on the S&P 500 Spdr (Spy) rather than on the S&P 500 index (Spx), which the author used in his article, because we can’t trade the Spx and I wanted to apply capital limitations rather than create a hypothetical test. In Figure 8, I show the consolidated (trading both long and short) portfolio equity curve using the author’s parameters for the indicator and with the Aiq pyramiding option turned on in the portfolio manager. I tried different capitalization settings in the range from 0.1% up to 2% and found that the 1% per trade with up to 100 possible positions was the setting to use with a starting balance of $500,000.

Figure 8: AIQ SYSTEMS, NVI SYSTEM ON SPY (consolidated equity curve). Here is the consolidated equity curve, trading both long and short, for the NVI system. This demonstrates trading the SPY instead of the SPX, buy and hold, over the test period 12/31/1993 to 6/11/2010.

The graph in Figure 8 compares the resulting equity curve to the Spx buy and hold, and Figure 9 compares the equity curves for trading long only versus trading short only. The system, especially the long side, outperforms the indexes on a risk-adjusted basis, which can be seen by comparing the Sharpe ratios for the system equity curves against the index’s Sharpe ratios. However, on a raw performance basis, the system underperforms all the indexes over the test period, which ran from 12/31/1993 to 6/11/2010.

Figure 9: AIQ SYSTEMS, NVI SYSTEM ON SPY (LONG VS. SHORT). Here is the NVI system equity curve trading long only versus trading short only, on SPY over the test period 12/31/1993 to 6/11/2010.

The code can be downloaded from the Aiq website at www.aiqsystems.com and also from www.TradersEdgeSystems.com/traderstips.htm.

! NORMALIZED VOLATILITY INDICATOR
! Author: Rajesh Kayakkal
! Coded by: Richard Denning 6/4/2010
! www.TradersEdgeSystems.com

! INPUTS:
ATRLen 		is 64.
NVILevel		is 1.343.

! ABBREVIATIONS:
C 	is [close].
C1	is valresult(C,1).
H 	is [high].
L 	is [low].

! AVERAGE TRUE RANGE
TR 	is Max(H - L,max(abs(C1 - L),abs(C1- H))). 
ATR	is expAvg(TR,64).
NVI	is ATR / C * 100.     ! PLOT 
Buy 	if NVI < NVILevel.
Sell 	if NVI > NVILevel.

—Richard Denning
richard.denning@earthlink.net
for AIQ Systems

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TRADECISION: NORMALIZED VOLATILITY INDICATOR

The article by Rajesh Kayakkal in this issue, “Normalized Volatility Indicator,” demonstrates using early bear phase signals to help get out of the market before it turns down.

To recreate the normalized volatility indicator (Nvi) in Tradecision, input the following in the Strategy Builder:

Entry Long:
var
NVI:=0;
x:=#;
end_var

NVI:= AvgTrueRng(64)/close * 100;
return NVI < x;

Entry Short:
var
NVI:=0;
x:=#;
end_var

NVI:= AvgTrueRng(64)/close * 100;
return NVI > x;

To import this strategy into Tradecision, visit the area “Traders’ Tips from TASC Magazine” at www.tradecision.com/support/tasc_tips/tasc_traders_tips.htm or copy the code from the Stocks & Commodities website at www.traders.com.

A table of sample results from the strategy is shown in Figure 12.

FIGURE 12: TRADECISION, Normalized Volatility Indicator. On applying the strategy with two optimized parameters (one for long and the other one for short), the summary table of strategy profits is displayed. The table lists the top 10 results sorted by the amount of profit obtained.

—Yana Timofeeva, Alyuda Research
510 931-7808, sales@tradecision.com
www.tradecision.com

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WAVE59: NORMALIZED VOLATILITY INDICATOR

In his article in this issue, Rajesh Kayakkal describes how he uses his normalized volatility indicator (Nvi) to time the Spx.

After implementing Kayakkal’s indicator, we were interested to see what would happen if we replaced his standard moving average with Wave59’s adaptive version, and we were impressed with the improved accuracy of this enhanced approach. We found that the threshold level needed to be lowered to 1.13 (instead of his 1.343 setting), and we also noticed that the index worked well to mark lows in declining markets when used in a discretionary way. Note the indication for a low in the Spx in Figure 14, which was occurring as we wrote this.

FIGURE 14: WAVE59, Normalized Volatility Indicator. Here, the indicator marks a low in a declining market.

The following script implements this indicator in Wave59. As always, users of Wave59 can download these scripts directly using the QScript Library found at www.wave59.com/library.

Indicator:  SC_Kayakkal_NVI
input: threshold(1.343);
  
 tr = truerange();
atr = average(tr,64);   # uncomment this line for original CPI
# atr = ama(tr,64,0.5,0.65,0.8); # uncomment this line for enhanced AMA
  nvi = 100*(atr/close);
                                      
 plot1 = nvi;         
 plot2 = threshold;                
 style2 = ps_dot;                 
 
 if (nvi crosses over threshold) buy(1,close,"market","onebar");
 if (nvi crosses under threshold) sell(1,close,"market","onebar");

--------------------------------------------

—Earik Beann
Wave59 Technologies Int’l, Inc.
www.wave59.com

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CHARTSY: NORMALIZED VOLATILITY INDICATOR

For Windows + Mac + LINUX

The normalized volatility indicator described by Rajesh Kayakkal in his article this issue is available as an indicator plugin in Chartsy. To install it, please go to Tools → Plugins → Available Plugins, check “Nvi,” and click “Install.” You can find the Java source code for the indicator by clicking here.

A sample chart is shown in Figure 16. Figure 17 shows the Nvi Properties in Chartsy.

FIGURE 16: CHARTSY, Normalized Volatility Indicator

FIGURE 17: CHARTSY, Normalized Volatility Indicator properties

To download Chartsy, discuss these tools, or help us develop other tools, please visit our forum at www.chartsy.org. Our development staff can assist with your needs, and perhaps you can become a Chartsy contributor yourself.

—Larry Swing
281 968-2718, theboss@mrswing.com
www.mrswing.com

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TRADING BLOX: NORMALIZED VOLATILITY INDICATOR

In “Normalized Volatility Indicator” in this issue, author Rajesh Kayakkal proposes a way to identify major equity market index cycles.

The indicator and corresponding system can be implemented in Trading Blox with the following steps:

1. Create a new Blox off type “Entry/Exit.” Name it “NVI System”
2. Define two parameters: nvi_Pivot (floating point) and ATRDays (integer)
3. Define the Atr indicator as average true range with moving average bars or ATRDays, and nvi as a calculated indicator with the formula: 100*ATR/instrument.close
4. Define the entry signals in the Entry Orders script of the block as follows:

   
   '-------------------------------------------------------------------
   'Trader's Tips August 2010
   'Normalized Volatility Indicator by Rajesh Kayakkal
   'Code by Jez Liberty - Au.Tra.Sy
   'jez@automated-trading-system.com
   'https://www.automated-trading-system.com/
   
   IF nvi < nvi_Pivot AND instrument.position <> LONG THEN
   		broker.EnterLongOnOpen
   ENDIF
   
   IF nvi > nvi_Pivot AND instrument.position = SHORT THEN
   		broker.EnterShortOnOpen
   ENDIF
   
   '---------------------------------------------------------------------
   
   

5. Define the entry signals in the Exit Orders script of the block as follows:

   
   '-------------------------------------------------------------------
   'Trader's Tips August 2010
   'Normalized Volatility Indicator by Rajesh Kayakkal
   'Code by Jez Liberty - Au.Tra.Sy
   'jez@automated-trading-system.com
   'https://www.automated-trading-system.com/
   
   IF nvi > nvi_Pivot AND instrument.position = LONG THEN
   		broker.ExitAllUnitsOnOpen
   ENDIF
   
   IF nvi < nvi_Pivot AND instrument.position = SHORT THEN
   		broker.ExitAllUnitsOnOpen
   ENDIF
   
   '---------------------------------------------------------------------
   
   

This code can be downloaded from https://www.automated-trading-system.com/free-code/.

—Jez Liberty, Au.Tra.Sy
jez@automated-trading-system.com
www.automated-trading-system.com/
for Trading Blox

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PROREALTIME: NORMALIZED VOLATILITY INDICATOR - KAYAKKAL ARTICLE CODE

What is the Nvi pivot value that separates bear and bull market cycles of Spx? I ran several backtests with about 10,000 datapoints of the Spx. The code for the backtest can be seen below. Backtests were done for a range of Nvi values from 1 to 1.5, using a step of 0.001. There were many optimal values of Nvi that gave good results, and I picked the value of 1.343, which is one of the optimal values.

Prorealtime Backtest Code

nvi=averagetruerange[64]/close*100
if nvi < x then
	if shortonmarket then
	exitshort COUNTOFSHORTSHARES SHARES AT MARKET REALTIME
	endif
	buy 1 SHARES AT MARKET REALTIME
endif

if nvi > x then
	
	if LONGONMARKET then
		sell COUNTOFLONGSHARES SHARES AT MARKET REALTIME
	endif	
	sellshort 1 SHARES AT MARKET REALTIME
	
endif

Optimization parameters for X are:
Minimum 1
Maximum 1.5
Step 0.001

—Rajesh Kayakkal
rajesh.kayakkal@bizken.com.

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