What it is and how to use it
What is it?
Garman-Klass Volatility is an estimator of price volatility that uses the opening, closing, high, and low prices to provide a more accurate measure of volatility. It aims to improve upon the basic range-based volatility estimators by incorporating more price points within each trading period. This method is particularly useful in markets with frequent price gaps and where opening and closing prices are significant.
Who made it?
The Garman-Klass Volatility estimator was developed by Mark B. Garman and Michael J. Klass in 1980. Their goal was to create a more precise measure of volatility that could better account for the full range of price movements within a trading period.
How is it calculated?
The formula for Garman-Klass Volatility (GK) is:
GK = sqrt((0.5 * (log(high / low))^2) - ((2 * log(2) - 1) * (log(close / open))^2))
Where:
high, low, close, and open are the respective prices of the asset for the period.
The logarithm (log) used here is the natural logarithm.
Code (ProRealTime)
How do you use it?
Garman-Klass Volatility can be used in several ways:
Volatility Measurement:
Provides a more comprehensive measure of true volatility by accounting for the full range of price movements within each trading period. This helps you identify periods of high and low volatility more accurately.
Risk Management:
By understanding the true volatility of an asset, you can set more informed stop-loss levels and position sizes.
Trading Strategy Adjustment:
Use the Garman-Klass Volatility to adjust your trading strategies according to current market conditions. Higher volatility may suggest larger price movements, while lower volatility indicates more stable prices.
FAQ
Q: What are the best settings for Garman-Klass Volatility?
A: The Garman-Klass Volatility doesn't have specific settings like other indicators. It's calculated using high, low, open, and close prices to provide a more accurate measure of volatility.
Q: How does Garman-Klass Volatility compare to ATR?
A: Both Garman-Klass Volatility and ATR measure volatility, but Garman-Klass uses more price data points (high, low, open, close) for a potentially more accurate measure, while ATR focuses on the range between high and low prices.
Q: Can Garman-Klass Volatility be used alone to make trading decisions?
A: While Garman-Klass Volatility gives a good sense of market volatility, it's usually best to combine it with other indicators to confirm signals and make more informed trading decisions.
Strategies using Garman-Klass Volatility
None so far.
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