Volatility Index Dynamic Average (VIDYA)

About Volatility Index Dynamic Average

Moving averages are the simplest indicators in technical analysis. Volatility Index Dynamic Average is more complex indicator from the family of moving averages. It takes into account Efficiency Ratio and adjust Exponential Moving Average (EMA) to strong and weak trends - to trending and ranging markets. The name of this MA perfectly reflects its nature. VIDYA is a moving average which is dynamically adjusted to volatility.

The Volatility Dynamic Index Average is relatively new moving average and not a lot of traders are aware of it. The main idea behind this Dynamic MA is to adjust bar period setting of EMA to volatility: make it smaller during strong trends and make it bigger during weak side-way trends. The VIDYA concept is very similar to KAMA (Kaufman Adaptive Moving Average) - a lag is reduced during a strong trend and a lag is increased to avoid choppy signals during a side-way trending. Both KAMA and VIDYA are considered as intelligent moving averages.

On the chart below you may compare VIDIA to the traditional EMA. You may see that EMA and VIDIA have almost identical lag during a strong up-move and later during a strong down move. However during the period of the side-way trending, the VIDYA is lagging more than EMA.



Since VIDIA is a moving average, it is used in technical analysis in the same way as other moving averages. The VIDYA's deviation from the close price could be used as an indication of bullish and bearish trends:

• The positive VIDYA deviation values reveal that moves above its VIDYA which is an indication of bullish trend;
• The negative VIDYA deviation values reveal that moves below its VIDYA which is an indication of bearish trend.

This is one of the simplest way of using VIDIA. However, the better result could be achieved when two moving averages are used and when trading signals are generated on the crossovers of these two MAs. One of the recommended techniques would be using traditional EMA as a Fast MA and VIDYA as a Slow MA. In this case

• a Buy signals is generated when EMA crosses above VIDYA;
• a Sell signal is generated when SMA crosses below VIDYA.

On the chart below you may compare crossovers of EMA and VIDYA to the crossovers of two EMAs. You may see that combination of the EMA and VIDA generated only two signals (1 buy and 1 sell). The combination of the two EMAs generated extra 4 signals during side-way trending at the top. All these extra signals were negative. The advantage of using the Volatility Adjusted Index Average over EMA is evident.