Rashad

Moving CO-covariance (covariance on covariance)

This is Covariance on Covariance. It shows you how much a given covariance period has deviated from it mean over another defined period. Because it is a time series, It can allow you to spot changes in how covariance changes. You can apply trend lines , Fibonacci retracements, etc. This is also volume weighting covariance.

This is not a directional indicator nor is moving covariance. This is used for forecasting volatility . This must be used in conjunction with moving covariance.
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//Moving Co-Covariance
study(title="Co-Covariance", shorttitle="MCCV", overlay=false)
src = vwap, len = input(30, minval=1, title="covariance length"), len2 = input(7, minval=1, title="Co-covariance look back length")
mean = vwma(src, len)
stdev = stdev(src, len)
covariance = (stdev/mean)
covariancemean = vwma(covariance, len2)
cstdev = stdev(covariance, len2)
cocovariance = (cstdev/covariancemean)
plot(cocovariance, title="covariance on covariance", style = line, color = aqua)
interesting, so based on this info ... we can expect a downward motion soon?
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miquael miquael
or maybe just more very gradual incline up ?
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Rashad miquael
This isn't a directional indicator. It is for forecasting volatilty of volatilty. In this sense you can think of it as a 2nd rate derivative of volatility. By this, you should expect volatility to deviate 9.28% this week from the current expected 6.08% deviation over the next 30 days. Likewise the probability of this deviation forecast falls by (1/(Period length - number of days)). From a maximum of 68.26% probability derived from the empirical rule about the percent of data points 1 stdev from their mean. You can also apply trendlines and fib retracements in order to arrive at targets for both vol and vol on vol.
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Rashad Rashad
Apply this to the VIX for some fun!
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Rashad Rashad
Essentially the next 7 days could see (rough calculation without calculating decay from passing time of estimate) 0%-5.64%-12.74% + or - deviation in the next seven days. I can assume that the majority of data point will be within 5.64% to 12.74% + or - the current price, and could reasonably estimate that in the next seven days to expect a 5.64% change in either direction (+ or -)
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In this indicator I forgot to multiply the result by 100. 0.0928 would be 9.28% etc. A small adjustment to the code will alleviate this. Just multiply cocovariance by 100, but if you like to read it as decimal points then this shouldn't matter to you.
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I would like to apologize, when naming this indicator I mixed up my terminology. This is coefficent of variation which shows the % a price deviates from its mean. Also known as unitized risk. In this case unitized risk of coefficent of variation
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