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Wavelet Energy Volatility (WEV)

Advanced energy-based volatility measurement using wavelet decomposition. WEV calculates volatility from the energy distribution across wavelet detail bands, providing a unique perspective on market volatility with built-in position management features.

Overview​

WEV differs from WATR in its approach:

  • WATR: Applies wavelets to True Range for ATR-like output
  • WEV: Measures energy across decomposition levels of price itself

This makes WEV more sensitive to the character of price movement, not just its magnitude.

Core Concept​

Wavelet energy measures how much "activity" exists at each frequency scale:

Energy_j = Σ(D_j[i]²) for all coefficients at level j

Total Energy = Σ(w_j × Energy_j) weighted across levels

WEV = √(Total Energy / N) normalized

High WEV indicates active, volatile price action. Low WEV indicates quiet, consolidating markets.

Studies​

WEV Panel Indicator​

  • Display: WEV line in separate panel
  • Color Coding: Changes based on volatility regime
  • Threshold Lines: Configurable high/low volatility zones

WEV Channel Overlay​

  • Display: Dynamic bands around price
  • Calculation: Price ± (WEV × multiplier)
  • Use Case: Volatility-adjusted trading ranges

Settings​

Energy Calculation​

SettingDefaultDescription
Wavelet TypeDB4Wavelet family
Decomposition Levels5Number of frequency bands
Energy WeightsUniformWeight per level (can emphasize certain scales)
NormalizationPer-barHow energy is normalized

Display​

SettingDefaultDescription
High Volatility Threshold75th percentileAbove = high volatility regime
Low Volatility Threshold25th percentileBelow = low volatility regime
Lookback Period100Bars for percentile calculation

Position Management​

SettingDefaultDescription
Enable Trailing StopfalseActivate volatility-based trailing
Trail Multiplier2.0WEV × multiplier for trail distance
Trail Activation1.0Minimum profit (in WEV units) to activate

Usage Patterns​

Volatility Regime Identification​

WEV clearly shows market regimes:

WEV LevelRegimeTrading Approach
High (>75th)High volatilityWider stops, smaller size, expect big moves
Medium (25-75th)NormalStandard parameters
Low (<25th)Low volatilityExpect breakout, tighter stops

Trailing Stop System​

WEV's trailing stop adapts to current volatility:

  1. Entry: Record entry price and initial WEV
  2. Trail Activation: When profit > WEV × activation multiplier
  3. Trail Distance: Current WEV × trail multiplier
  4. Stop Update: Moves only in profitable direction

Example:

  • Entry: 4500, WEV: 10
  • Trail activates at: 4510 (profit > 10 × 1.0)
  • Trail distance: 20 points (10 × 2.0)
  • Trail stop: 4490 initially, moves up as price rises

Breakout Anticipation​

Low WEV often precedes breakouts:

  1. WEV reaches historically low levels (<10th percentile)
  2. Price consolidates in tight range
  3. Watch for WEV expansion + price break
  4. Enter in breakout direction with volatility-adjusted stop

Position Sizing​

Scale position size inversely to volatility:

High WEV → Smaller position
Low WEV → Larger position (but watch for breakout)

Size = BaseSize × (TargetRisk / (WEV × multiplier))

Energy Band Analysis​

WEV can show energy contribution by frequency band:

Fast Energy (D1-D2)​

  • Noise and micro-structure
  • High during chaotic markets
  • Spikes on news events

Medium Energy (D3-D4)​

  • Intraday swings
  • Trading-relevant volatility
  • Most useful for day trading

Slow Energy (D5+)​

  • Longer-term volatility
  • Trend strength indicator
  • Position trading relevance

Comparison with WATR​

AspectWATRWEV
InputTrue RangePrice
MeasuresRange-based volatilityEnergy-based volatility
ATR ComparableYesNo (different scale)
Best ForStop placementRegime identification
Trailing StopsManualBuilt-in

Troubleshooting​

WEV Values Seem Arbitrary​

  • WEV isn't in price units; use percentiles for context
  • Enable threshold lines for regime visualization
  • Compare to historical WEV, not absolute values

Trailing Stop Too Tight/Wide​

  • Adjust Trail Multiplier
  • Consider market volatility regime
  • Use WATR for ATR-like stops if preferred

Slow Updates​

  • Reduce Decomposition Levels for faster calculation
  • Ensure adequate historical data

See Also​