# VIDYA – Volatility Index Dynamic Average

The VIDYA indicator effectively incorporates volatility, enabling traders to capture market trends and capitalize on directional moves by focusing on relevant price action

7 minutes

#### Introduction

The Volatility Index Dynamic Average (VIDYA) is a technical analysis indicator commonly used in financial markets to measure trend and volatility. Tushar Chande, a well-known technical analyst and author of multiple books on technical analysis, developed the VIDYA indicator. He is also the creator of other popular technical indicators such as the Chande Momentum Oscillator (CMO) and the Aroon Indicator. Chande introduced the VIDYA indicator in his book “The New Technical Trader: Boost Your Profit by Plugging into the Latest Indicators,” co-authored with Stanley Kroll, which was published in 1994.

The VIDYA indicator is a type of moving average that adjusts itself to the volatility of the market. The VIDYA indicator is designed to respond quickly to changes in volatility and filter out market noise. It is calculated using a combination of the standard deviation and the Exponential Moving Average (EMA) of the price data.

Traders commonly use the VIDYA indicator in conjunction with other technical indicators to confirm trends and to generate trading signals. For example, traders may use the VIDYA indicator in combination with the Relative Strength Index (RSI) to identify overbought or oversold conditions in the market.

Overall, the VIDYA indicator is a valuable tool for traders seeking to capture market trends while quickly responding to changes in volatility and filtering out noise.

#### Computing the VIDYA Indicator

The formula for calculating the VIDYA (Volatility Index Dynamic Average) indicator is as follows:

VIDYA = EMA(Price, N * (Volatility / 100))

where:
EMA is the exponential moving average;
Price is the price data (e.g. closing prices);
N is the number of periods used in the calculation (e.g. 20, 50, 100);
Volatility is the volatility index, calculated as the standard deviation of the price data over the past N periods.

To calculate the VIDYA indicator, you first need to calculate the volatility index using the following formula:

Volatility = Sum (AbsoluteValue (Price - EMA(Price, N))) / N

To calculate the VIDYA indicator, the average distance between the price and the exponential moving average (EMA) over the past N periods is computed using a formula. The absolute value of the distance is used to ensure that it is always a positive number.

Once you have obtained the volatility index, you can use it in the first formula to calculate the VIDYA indicator. The VIDYA indicator adjusts itself to changes in volatility, which enhances its responsiveness to market conditions.

#### The importance or need for VIDYA in technical analysis

Traders who aim to capture trends and respond quickly to changes in market volatility find the Volatility Index Dynamic Average (VIDYA) indicator to be an important technical analysis tool. This indicator is a type of moving average that adjusts to the volatility of the market, making it more responsive to market conditions.

Trend identification

The VIDYA indicator offers several key uses, such as identifying trends in the market. When the VIDYA line rises, it indicates an uptrend, and when it falls, it indicates a downtrend.

Additionally, the VIDYA indicator can generate buy and sell signals based on crossovers with the price chart or other technical indicators, with a bullish crossover indicating a buy signal and a bearish crossover indicating a sell signal.

Volatility analysis

Moreover, the VIDYA indicator can be used to measure volatility in the market. When the VIDYA line rises, it indicates that volatility is increasing, and when it falls, it indicates that volatility is decreasing.

Stop loss placement

Finally, traders can use the VIDYA indicator to place stop-loss orders, placing their stop-loss orders slightly below the line in an uptrend and slightly above the line in a downtrend.

In summary, the VIDYA indicator is a helpful tool for traders who want to capture trends in the market while filtering out noise and responding quickly to changes in volatility. It can also be combined with other technical indicators to confirm trends and generate trading signals.

#### Tushar Chande’s suggestions on how to use the VIDYA Indicator

Tushar Chande, the creator of the VIDYA indicator, has shared some tips on how traders can effectively use this tool in their trading strategies. Below are a few suggestions he has provided:

Combine with other indicators

Chande suggests using the VIDYA in combination with other technical indicators such as RSI, MACD, or Bollinger Bands to confirm trends and generate trading signals.

Use price action analysis

Chande recommends using the VIDYA in conjunction with price action analysis to identify key support and resistance levels and other market signals.

Identify key levels

The VIDYA indicator can help traders identify important support and resistance levels, which can be used to place orders or as potential exit points.

Use multiple timeframes

Chande advises using the VIDYA on multiple timeframes to get a better understanding of the trend and volatility in the market.

Traders should experiment with the parameters of the VIDYA indicator, such as the number of periods used in the calculation or the percentage of volatility, to find the optimal settings for their trading strategy.

Backtest the strategy

Before using the VIDYA indicator or any trading strategy in live markets, it’s important to backtest the strategy on historical data to assess its performance and identify weaknesses.

Practice proper risk management

Traders should practice proper risk management when using the VIDYA indicator, such as setting stop-loss orders, taking profits at predetermined levels, and managing position sizes.

While the VIDYA indicator can be a useful tool for traders to capture trends and respond to changes in volatility, it’s important to use it in conjunction with other tools and techniques, adjust the parameters to suit their trading style, and practice proper risk management to maximize its effectiveness.

#### Advantages & Limitations of the VIDYA Indicator

Below are some advantages and limitations of using the VIDYA indicator in trading:

• Trend capturing: The VIDYA indicator is designed to capture trends in the market, making it beneficial for traders who want to capitalize on directional moves.
• Noise filtering: By considering volatility in its calculation, the VIDYA indicator can filter out noise and assist traders in concentrating on the most significant price action.
• Customizable: Traders can customize the VIDYA indicator by adjusting its parameters to match their trading style and preferences.
• Simple to understand: The VIDYA indicator is relatively easy to understand and can be used by traders of all experience levels.

Limitations

• Lagging indicator: The VIDYA is a lagging indicator, similar to most technical indicators, which means it may not provide signals until a trend is already underway.
• False signals: In markets with low volatility or erratic price movements, the VIDYA indicator may generate false signals.
• Unsuitable for all market conditions: The VIDYA indicator may not be suitable for all market conditions, particularly in choppy or range-bound markets.
• Over-reliance on indicators: Some traders may become too reliant on the VIDYA indicator and overlook other essential aspects of trading, such as risk management and fundamental analysis.

It’s crucial to keep in mind that these benefits and drawbacks may vary depending on the market, timeframe, and trading strategy used. Traders should evaluate the potential benefits and drawbacks of any trading tool or indicator carefully before incorporating it into their trading plan.

The VIDYA indicator is a widely-used technical analysis tool that effectively captures trends and eliminates market noise by considering volatility in its calculation. Its ability to identify directional moves makes it a valuable resource for traders. The indicator is highly customizable, user-friendly, and can be used together with other technical indicators and price action analysis.

It is crucial to note that trading always carries risk, and there is no assurance that any trading strategy or tool, such as the VIDYA indicator, will result in profitable trades. Therefore, traders must evaluate their risk tolerance and trading objectives before incorporating any trading strategy or tool. Furthermore, traders should follow proper risk management practices and avoid risking more than they can afford to lose. Remember that past performance does not guarantee future results, and caution is always advised in the volatile world of trading.