Coiled Moving AveragesThis indicator detects when 3 moving averages converge and become coiled. This indicates volatility contraction which often leads to volatility expansion, i.e. large price movements.
Moving averages are considered coiled when the percent difference from each moving average to the others is less than the Coil Tolerance % input value.
This indicator is unique in that it detects when moving averages converge within a specified percent range. This is in contrast to other indicators that only detect moving average crossovers, or the distance between price and a moving average.
This indicator includes options such as:
- % difference between the MAs to be considered coiled
- type and length of MAs
- background color to indicate when the MAs are coiled
- arrows to indicate if price is above or below the MAs when they become coiled
While coiling predicts an increased probability for volatility expansion, it does not necessarily predict the direction of expansion. However, the arrows which indicate whether price is above or below the moving average coil may increase the odds of a move in that direction. Bullish alignment of the moving averages (faster MAs above the slower MAs) may also increase the odds of a bullish break, while bearish alignment may increase the odds of a bearish break.
Note that mean reversion back to the MA coil is common after initial volatility expansion. This can present an entry opportunity for traders, as mean reversion may be followed by continuation in the direction of the initial break.
Experiment with different settings and timeframes to see how coiled MAs can help predict the onset of volatility.
