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Volatility Revisited

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Volatility Revisited
by Ralph Russell, Nasdaq Real-time Signals Trader

Recently I wrote an article, Daytrading in Quiet Markets, dealing with the reduced ranges we have been experiencing. While the concepts in the above mentioned article are basically correct, there is more to be said about this issue when it comes to daytrading!

I have crabbed, complained, cried out and prayed that daily range would increase. We made great money when we had increased ranges and have basically had difficulty being profitable since we have had "reduced ranges." I have said volatility was low and that is NOT CORRECT. Volatility is actually very high in the Nasdaq mini 100 Index. Very High. It is almost three times the volatility of the S&P and the DOW.

Every trader I speak with, every trader that visits with me, we all are complaining that we have little to work with. We are wrong! Allow me to present volatility in a new and different light for all of us to look at and see if this information will help us.

See Volatility in a New Light

We will call our volatility "Relative Volatility" for the lack of a better name at the moment. When we use the term "relative" I assume we are talking of something that is related to something else. This is correct.

When we began this mini NQ service at the end of the first 3 months in mid December of 2000, (as pointed out in Daytrading in Quiet Markets) we were averaging 166 points of range per day on a 5-day basis and 157 points of range per day on a 60-day basis as taken from the cash NDX index daily chart. I have complained that lately we have been averaging 50 points or less per day and that the 60-day average range was not a great deal better.

That is all hogwash! It is wrong and I apologize to you all for my ineptness in examining this matter.

Let us Set the Record Straight.

The 60-day average closing price on December 19th, 2000 was 3066 so the 157 points of average daily range was 5.12% of average comparable (relative) price. The average closing price was 2576 so the average 5-day range was 6.44% of average comparable (relative) price.

To turn these figures around and make them useful, if we know that our average range for the day may be 6% of price and price is 2500 we can expect 150 points of range.

  • Once we have this understanding, we can then look to see where we reach that point, above and below yesterday's close initially.
  • Then check to see if we have the Pivot, the 1st or 2nd resistance or support in that area, as it will probably be a significant number for the day of trading coming up.
  • We may even look to see where the "Math of the Markets" has significant support or resistance levels that may correspond or be "in the neighborhood," so to speak.

Once we get what might be an initial low or initial high in our intraday market, we can apply the average range concept to it and come up with a picture of the day's trading possibility.

If the average range is 40 points, a five wave structure may have waves in it that only exceed the last wave by 8 points or so at best, (40/5). So to try to get 10-12 or 14 points may be a waste of energy and a source of frustration for the trader.

Some of our best results were from February of 2001 through August of 2001 although we were struggling toward the end of that period.

On August 31st, 2001 we were averaging 1672 price on a 60-day basis and average range was 49 points or 2.93% of price. I would place stop orders under pivots that may have been an 8-point wave and try to get the market to move into a good profitable trade. It was not working out! There were not going to be any 150 point days where a sell stop under or above a pivot would net 10 - 15 - 20 or more points follow-through.

I have struggled since fall of 2001 until the present and have done everything but tear my hair out. It has been frustrating for me as trade after trade has gone in the money and then reversed, or even just sat for hours doing nothing.

Determining Probable Daily Range

When you put it together and realize that perhaps 3% of price is a good range for the day you begin to see the light. Am I going to buy that breakout to a new high? Not if we are close to our possible range of the day. In fact I may sell it, fading the market, understanding that a close stop loss order may work for the betterment of profits rather than waiting to place a stop under a pivot.

Once you get a picture of the possibility of the day, in terms of range as a percentage of prices, everything comes into place. If we have 3% we have 3%. Will it be 3%? Probably not. It may be 4% or 2% but at least we are not looking for a 150-point range when that might be 10%.

This past Tuesday, January 22nd, 2002 I had a very important number at 1496 level. It was a .382 retracement of 1739 and 1104, the high on December 5th, 2001 and the low of September 21st, 2001. I was convinced and adamant about the market making my numbers. I tried several times as we broke trying to make this number. When the day was done we had not made the number and I was out for my largest loss in some time. I wondered why at the time.

Now I can clearly see the problem. The first event was we opened at 1570.5 -- that was about the .618 level of the previous day's range. Then we sold off finally making 1503 as a low late in the day, when I was convinced we would make 1496. The problem was one of understanding the probability. We already had a 4.41% range for the day of the previous day's closing value and even in all my perfectionism of the "Math of the Markets" could not get this market, which has been averaging less than 3% in range, to stretch it out to just short of 5%. I already had about 150% of an average day's range at this point in time.

I wasn't about to obtain my numbers. You can say it has to do with round numbers such as 1500 and that may have some merit, but I am inclined to believe it has more to do with how far we needed to stretch above the standard deviation of range to obtain the number.

If I had the proper "picture of possibility" in my mind, I could have very soon understood that if 1571 was the high we were headed at least for 1530 or 1525 and made a very nice trade.

Currently, in mini Nasdaq 100, we are averaging about 3.16% of closing price on a 5-day average. At a price of 1562 this means we would look for a range of about 49 points on Monday as normal. The actual range may be more, it may be less. If we add 49 points to 1562.5 Friday's close (January 25th, 2002) we get 1611.5 and if we subtract it from Friday's close we get 1513.5 and I would venture that this range possibility will cover 99% of the possible outcome for Monday, short of a natural unexpected calamity.

Now I need a high or a low to further refine the range on Monday. Once we have an initial High or Low on Monday we can add or subtract as appropriate and have a view of the day's trading range before it occurs.

This knowledge will at some point on Monday allow us to consider selling into the highs or buying into the lows with some degree of confidence and with a short stop loss point. Without the consideration of range this is a near impossibility to do from a mental standpoint. Picking Tops and Picking Bottoms is said to lead to Picking Cotton and this may not be true armed with the correct knowledge.

This knowledge will change our trading result outcome over time to an even more successful venture.

For your general information the DOW Industrial basis the cash are currently averaging about 1.22% and the S&P is averaging about 1.17% or about 1320 points per day and there is not a lot of sense wishing for 2500. The S&P made 1120 points today (January 25th, 2002 ) and so achieved 85% of its possibility.

We all know that indicators like Stochastic and Relative Strength and CCI etc. are really pretty worthless on short time frame intraday charts, However, when we begin to consider range possibilities perhaps these tools become more useful to us.

I know 1573 was the pivot in mini Nasdaq today (Jan. 25, 2002) and I sold it twice as we rallied into it after we made the highs at 1576.5. It seemed like a low risk trade as the stop was no more than 5 points and the possibility was the 1556 level, which eventually was made. I may not have handled these trades totally correctly but we took money from each entry that was worthwhile considering the risk.

I will probably revisit this again as I work out more detail to the concept of range consideration as a tool to guide our trading decisions.

© 2002 Ralph Russell



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