The indicator you are referring to shows the historical volatility, as measured by the ATR() and a threshold. I do not know the exact formula for the threshold, as it cannot be identified from the chart, but this does not matter as there are better options.
Volatility can be used in two ways
(a) To determine favourable trading times: You only want to trade when expected (implied) volatity is up. The indicator uses historical volatility as a proxy for expected volatility.
(b) Volatility is higher in bear markets versus bull markets. So you can use this indicator to identify bullish or bearish conditions, which does not work on intraday charts, as the bulls can also generate high volatility. For this see also -> TASC August 2010 issue, Rajesh Kayakkal, Normalized Volatility Indicator
So let us come back to the first idea: Trade if volatility is above a certain threshold, stay away if volatility is too low. Now imagine that you empirically found a suitable threshold and add that to your volatility indicator. The problem is that the volatility indicator is lagging, in particular if you smooth it, so it will only detect the market open one hour into the session! To get a faster signal you can use a MACD, which you apply to your normalized volatility. Best use MACD BB Lines (see download section) and apply them to the NVI (normalized volatiliy) indicator.
I attach the NVI indicator, as coded by NT for the TASC issue August 2010. To identify trading periods, apply the MACDBBLines directly to the NVI (or Average True Range, which is equivalent). The chart below shows, how you can use trendlines and the zeroline of the MACD to identify volatility conditions favourable to trading. You do not need to show the NVI on your chart, the MACDBBLines(NVI) would be sufficient.
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The volatility indicator (NVI/MACDBBLines) is not suitable to be used on range charts. Range charts have by definition a constant intrabar volatility. The NVI uses the average true range, so it still catches the directional volatility associated with the move of the median of the bar. The directional volatility comes sort of after the fact, so the indicator lags.
For range charts you would rather want to measure the inverse of the average duration of the range bar (build a time based RSI) and then apply the MACDBBLines on top of that. As there are few bars during quite periods, you would need a shorter period for detecting the increase in volatility that is the case for fixed period bars.