The Custom VIX Oscillator is a combination of the Average True Range (ATR) and the Standard Deviation (STD), which are both measures of volatility. The oscillator is normalized to range between 0 and 100. The interpretation of this oscillator can be based on the following points:
Higher values indicate higher volatility: When the Custom VIX Oscillator is at high levels (closer to 100), it indicates that the market is experiencing higher volatility. This can be a sign of potential trend reversals or increased uncertainty in the market.
Lower values indicate lower volatility: When the Custom VIX Oscillator is at low levels (closer to 0), it signifies that the market is experiencing lower volatility. Lower volatility periods may indicate stable trends or consolidation in the market.
Overbought/Oversold conditions: As with other oscillators, you can interpret the Custom VIX Oscillator as indicating overbought or oversold conditions. When the oscillator reaches extreme values (close to 100 or 0), it may indicate that the market is reaching an extreme in volatility, and a reversal in the current trend could be imminent.
Divergences: You can look for divergences between the Custom VIX Oscillator and the price action. For example, if the price makes a new high, but the oscillator fails to make a new high, this could signal a potential bearish reversal. Similarly, if the price makes a new low, but the oscillator fails to make a new low, this could signal a potential bullish reversal.