Coiled Moving AveragesThis indicator detects when 3 moving averages converge and become coiled. This indicates volatility contraction which often leads to volatility expansion, i.e. large price movements.
Moving averages are considered coiled when the percent difference from each moving average to the others is less than the Coil Tolerance % input value.
This indicator is unique in that it detects when moving averages converge within a specified percent range. This is in contrast to other indicators that only detect moving average crossovers, or the distance between price and a moving average.
This indicator includes options such as:
- % difference between the MAs to be considered coiled
- type and length of MAs
- background color to indicate when the MAs are coiled
- arrows to indicate if price is above or below the MAs when they become coiled
While coiling predicts an increased probability for volatility expansion, it does not necessarily predict the direction of expansion. However, the arrows which indicate whether price is above or below the moving average coil may increase the odds of a move in that direction. Bullish alignment of the moving averages (faster MAs above the slower MAs) may also increase the odds of a bullish break, while bearish alignment may increase the odds of a bearish break.
Note that mean reversion back to the MA coil is common after initial volatility expansion. This can present an entry opportunity for traders, as mean reversion may be followed by continuation in the direction of the initial break.
Experiment with different settings and timeframes to see how coiled MAs can help predict the onset of volatility.
COIL
Mini Coil With Real RangeA mini coil is a low risk setup that can be used within a longer term pattern. The coiling action represents a tightening of volatility and is most effective when price is no more than 10-15% above a prior base.
The mini coil was created by Matt Caruso, @CarusoInsights, a professional investor and top performer in the 2020 US Investing Championship, finishing with a 346% return.
Mini Coil Setup
▪ Given an initial bar, at a minimum, two bars follow that don't exceed the high or low of the initial bar.
▪ The entry is when there is a break above the high of the initial bar.
▪ A common stop is the low of the last bar before the breakout.
Unique Features
▪ Real Range
When the initial bar open is a gap up greater than the previous bar close, when using the real range, the start of the mini coil is the close of the bar prior to the gap up. See the examples below for more information.
▪ Thresholds
During the formation of a mini coil, price may deviate slightly above or below the high or low of the initial bar. It can be helpful to set a threshold which allows for small percentage moves, above or below, yet still consider the price to be within the high/low range of the initial bar.
▪ Breakout Price
To help track the potential breakout price, there is an option to show the high of the initial bar.
Mini Coil Examples
DDOG - Real Range
AAPL - Historical Mini Coils
AMD - Real Range and Threshold %
