In March 1992, When Tushar S. Chande presented the idea of VIDYA for the very first
time, he used Standard Deviation to determine Volatility Index. Later on, Chande
developed the Chande Momentum Oscillator. In 1995, he used value of CMO as Volatility
The Formula for Determining VIDYA using CMO is as under:
Smoothing Constant = 2/N+1
N= Number of Days,
Volatility Index = CMO (Price).
Volatility Index Dynamic Average = Smoothing Constant * Volatility Index * Price
+ (1-Smoothing Constant * Volatility Index) * Price [-1]
Chande Momentum Oscillator is usually determined for Nine Periods. In order
to Determine Exponential Moving Average, the formula is:
Exponential Moving Average [TODAY] = Alpha * Closing Price [TODAY]
+ (1-Alpha) * Exponential Moving Average [PREVIOUS]
Standard Exponential Moving Average can be calculated by the formula mentioned below:
Exponential Moving Average (i) = Price (i) * F + EMA (i-1)
F = 2/ (EMA Averaging Period +1) – Smoothing Factor,
Price (i) = Current Price,
EMA (i-1) = Previous Value of EMA.
In order to determine the Value of VIDYA using Chande Momentum Oscillator, use:
VIDYA (i) = Price (i) * F * ABS (CMO (i)) + VIDYA
(i-1) * (1 – F * ABS(CMO (i)))
ABS (CMO (i)) = Absolute Value of Chande Momentum Oscillator,
VIDYA (i-1) = Previous value of VIDYA.
In this formula the value of Chande Momentum Oscillator is determined using this
CMO (i) = (Up Sum (i) – Down Sum (i)) / (Up
Sum (i) + Down Sum (i))
Up Sum (i) = Sum of Positive Price Increments during the Current Period,
Down Sum (i) = Sum of Negative Price Increments during the Current Period.
The Value of Alpha/Smoothing Constant is determined by the formula above. Alpha
can also be determined by the formula:
Alpha = 0.2 * Volatility of Last 9 Days/Volatility of Last 30 Days
VIDYA is normally not used for trading purposes. The major output of VIDYA is its
upper and lower borders which give traders an indication of the Upper Band ad Lower
Band that are N% above or below VIDYA. In order to interpret trade signals using
this indicator, the method followed is quite similar to the one used in Bollinger
Bands. VIDYA is characterized of altering its smoothing period according to the
Volatility Index and has no upper or lower limit of Smoothing Period either.
The VIDYA Smoothing Period can go immeasurably high when Volatility Index nears
to 0. At this point, the Moving Average will hold a constant value and will be close
to Previous Value of VIDYA. The Smoothing Period becomes equal to the value of User
Choice of N (Number of Days) only when the Volatility Index is equal to 1. Evidence
is provided in the graphical picture provided below with N on the Y Axis and Volatility
Index on the X Axis.
Similarly when the Volatility Index rises above the value of 1, Smoothing Period
immediately drops below the Number of Day (N) selected by the user. Smoothing Period
will be equal to 1 when the Value of Volatility Index is equal to N/2 + 0.5. This
means that the price will be equal to Volatility Index. So, one should make sure
that the value of Volatility Index is controlled under N/2 + 0.5.
Here a question arises that which Volatility Index is better to use? In order to
answer this question, a number of considerations must be taken into account. Chande
originally used the Standard Deviation as his Volatility Index but later on in 1995,
introduced his own Chande Momentum Oscillator.
The Basic Superiority of CMO over Standard Deviation is that it can range from -100
to 100 which is divided by 100 to obtain Absolute Value. The outcome of this division
is quite similar to the results of Efficiency Ratio. That’s why CMO is the
most commonly used Volatility Index. Strength of Trend can be determined easily
with the help of CMO. If the readings which may range from 0 to N/2 + 0.5 are on
the higher side then there is a strong trend indication.
Role of Co-Efficient of Determination (r2)
The main role of Co-Efficient of Determination is to determine the strength of a
Trend. It is a lagging indicator that acts as a confirming indicator. The value
of r2 is dependent upon on the Number of Days (N) taken into consideration. For
a fixed number of days there is a suggested critical value like for 10, 20 and 30
days the critical values are 0.4, 0.2 and 0.1 respectively. Whenever the values
of r2 are greater the suggested critical values for a given number of days, the
trend is said to be statistically significant. In order to determine the direction
of a trend, the slope of regression is used. This can help anyone put positions
according to their wish.
It is better to deploy both slope and r2 when making any trading decision. Reason
behind it is that, even with a strong trend if the slope is small it may not attract
as much of the interest of a Short-Term Trader as it should normally with a strong
trend. Similarly, a weak trend with a reasonable slope indicates that the trend
is about to change. So, we can conclude that when the values of slope and r2 are
close to 0, it signifies that the trend is weak and vice versa.
In order to benefit from a significant trend, first of all determine the position
of slope i.e. whether it is positive or negative. A Long Position is favorable when
the Slope is extremely positive. On the other hand, if the Slope is extremely negative,
one should open a short position. After making a peak (either positive or negative)
the Slope will head towards the value of 0. This point indicates profit collection,
Stop tightening and taking an anti-trend position. To conclude, there are a variety
of strategies available while using Regression Analysis.
Advantages of Using VIDYA
- The Majority of Moving Averages deployed fixed number of days to determine the Volatility
Index. Unlike other Moving Averages, VIDYA adjusts its length according to the Market
- VIDYA speeds up when the prices are moving rapidly and slows down
when the prices are showing slight or marginal difference from their previous positions.
VIDYA allows its users to adjust instruct their trading style while determining
future trends. The Range of VIDYA is highly dynamic, this allows the traders to
adjust the number of days to be included and which days to be excluded.
Change Momentum Oscillator can be utilized along with VIDYA to form an active average
specifically designed to determine market momentum.
- Co-Efficient of Determination
helps in determining the Overbought and Oversold Conditions. The Slope can also
be used for the same purpose. Thus, the direction of next trading day can be determined
well in advance to develop an action plan for your future trading decisions.
VIDYA helps its users plan for more accurate contingencies. One can initiate new
positions, set stops, or close old ones on the basis of a range of outcomes chalked
out by the trading plan.
- The Responsiveness of VIDYA is far better then other
Indicators during times of High Volatility and Price Movements.
Disadvantages of Using VIDYA
- VIDYA doesn’t predict precise change from the actual. The Purpose of VIDYA
is to give an estimated trend direction on the basis of past days.
- A disadvantage
or rather threat of using VIDYA is that in majority of the cases, the majority of
technical indicator including VIDAY have failed to predict future trends in some
specific markets. The use of VIDYA in such markets is not only useless but it can
be costly as well.
- Using VIDYA or any other moving average may not be as much
fruitful as a weighted average would be. The only evidence for it is that it considers
more situations then a single moving average.
- VIDYA doesn’t consider any
scenario other then the one provided to it within the Number of days in consideration.