Volatility-Based ThilA l iTechnical Analysis - Meetupfiles.meetup.com/1004673/Volatility-Based TA -...
Transcript of Volatility-Based ThilA l iTechnical Analysis - Meetupfiles.meetup.com/1004673/Volatility-Based TA -...
Volatility-BasedT h i l A l iTechnical Analysis:Strategies for Trading the Invisble
Kirk Northington
With Companion Websitehttp://www.tradingtheinvisible.com
tradingtheinvisible.com
metaswing.com
Kirk Northington
The author of Volatility-Based Technical Analysis: Strategies for Trading
BIO
The author of Volatility Based Technical Analysis: Strategies for Trading the Invisible. Wiley Trading Series, John Wiley & Sons Publishers. ISBN: 978-0-470-38754-2.
The owner of Northington Trading, LLC, and the creator of MetaSwing, a g g, , g,MetaStock and TradeStation Add-On. He trades his own money, and uses MetaSwing technical analysis methods exclusively.
Kirk Northington is a technical analyst. He is an associate member of the Market Technicians Association, through which he is participating in the Chartered Market Technician (CMT) Program.
Kirk has a B.S. degree from Nicholls State University, in Thibodaux, L i i H h i i i l i iLouisiana. He has extensive experience in control system engineering, software engineering, and project management. Kirk, his wife Faith, and his two sons live in Charlotte, North Carolina.
kirk@metaswing com or (910) 789 0673
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[email protected] or (910) 789-0673
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The Companion Website: tradingtheinvisible.com
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Goal of Volatility-Based Technical Analysis
Goal:
Identify a point where, mathematically y p , yspeaking, price should not be, at that point in time;p ;
i.e., find the true inefficiencies.,
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Mantra of Volatility-Based Technical Analysis
Mantra:
Money is made at the Extremesy
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How is this possible?
Volatility Measurement:y
Identifies Extremes
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Can I understand volatility measurement?
YesYes
Volatility Measurement with:Volatility Measurement with:
CalculusCalculus
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VBTA = New Concepts and Capabilitis for TA
This Presentation:
Will pick one concept and capability and solve for it:
Trend Compensation
We will also view volatility-based support and resistance.
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Why is Volatility Measurement Important?
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Why is Volatility Measurement Important?
Why?Why?
• Equity Options Tradingq y p g
• VaR – Value at Risk modeling• Portfolio Managment• Risk Management
• Program Trading
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Why is Volatility Measurement Important?
Brain Power page 5
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Quatitative mathematics focuses heavily on volatility measurement
Why is Volatility Measurement Important?
Horse Power
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Why is Volatility Measurement Important?
Horse Power
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Why is Volatility Measurement Important?
Brain Power page 5
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Quatitative mathematics focuses heavily on volatility measurement
Why is Volatility Measurement Important?
Horse Power
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Opportunities
Take the Offensive
• Redraw the Playing Field• Simple Volatility Measurement• Avoid Systemic RiskAvoid Systemic Risk• Hidden Momentum• True Overbought and Oversold• Exit on Cue
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Working with Volatility Measurement
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What is Volatility?
Concept . . . Not a Specific Measurement
• “In truth volatility is more of a concept applied to whatever the task at hand needs it to be. So conceptually volatility as it applies to a tradable instrument is just a measurement of an instrument’s price, in terms of rise or fall, within a given time frame.”
• Used to project an extreme that might be reached, within a reasonable probability
• Most commonly expressed with Standard Deviation
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What is Volatility?
Historical and Implied
• “Historical Volatility (also referred to as Statistical Volatility) is a measure of movement within a given period of time. Historical volatility is normally measured using forms ofHistorical volatility is normally measured using forms of standard deviation and is expressed in terms of percent.”
• “Implied Volatility: A measure of possible, or ‘expected’Implied Volatility: A measure of possible, or expected movement of the underlying stock’s price, as projected forward through time, expressed as a percentage. It is created by any of many options pricing models. These pricing models utilize all known options trading factors, in addition to the actual current trading price of the option’s premium.”
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Volatility Unmasked
Basic Forms of Volatility Measurement
• Standard Deviation• Average True RangeAverage True Range• Percentage• Mean (or Average)• Linear Regressiong• Standard Error• R Squared• Variance
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Volatility Measurement is Simple as 1 - 2 - 3
Standard Deviation (20)
1. Difference between Close and moving average
2. Square it (Key Step)
3. Add the most recent 20 of these, and calculate square rootand calculate square root.
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Stdev(C, 20)tradingtheinvisible.com metaswing.com
Average True Range
It is the greatest of:
• The distance from today’s high to today’s low.y g y• The distance from yesterday’s close to today’s high.• The distance from yesterday’s close to today’s low.
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ATR(C, 14)
Linear Regression
Most Efficient – Least SquaresMost Efficient Least Squares
1. Difference between price and h i l li h itheoretical line, then square it.
2. Add up all the squared values
3. Redraw the line so that the sum of the squared values is lower.(lather, rince, repeat)
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( , , p )
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LinearReg(C, 20)
Predictive Qualities
Basic Forms of Volatility Measurement
• Standard Deviation• Average True Range• Average True Range• Percentage• Mean (or Average)• Linear Regression• Standard Error• R Squared
V i
Forward Predictive Value = 2 to 5 Periods
• Variance
• Are Fractal and therfore Chart Periodicity independent
• Dependent on lack of conflicting / overriding fundamental news; as is all TA
• Amplified by Trend
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• Design specific components for specific purposes
Specific Purpose
Basic Forms of Volatility Measurement
• Standard Deviation• Average True Range• Average True Range• Percentage• Mean (or Average)• Linear Regression• Standard Error• R Squared
V i
T d C t d
• Variance
Trend Compensated
O S ld / O b ht D t tiOverSold / Overbought Detection
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Northington RSIV{Copyright Kirk Northington, Northington Trading, LLC. { py g g , g g,All rights reserved}
{User Inputs}pds1:= Input("Lookback", 2, 1000, 30);pds2:= Input("Linear Regression Periods", 2, 1000, 40);pds3:= Input("ATR Periods", 2, 1000, 7);
(" h h ld" 50 99 70)Upper:= Input("Upper Threshold", 50, 99, 70);Lower:= Input("Lower Threshold", 1, 59, 30);
{Express the prevailing trend}x1:= (C - LinearReg(C, pds2));
{Calculate the RSIV indicator}
Trend Compensation{Calculate the RSIV indicator}x2:= If(x1 > Ref(x1, -1), 1, 0);x3:= If(x1 > Ref(x1, -1), x1 - Ref(x1, -1), 0);x4:= If(x1 < Ref(x1, -1), 1, 0);x5:= If(x1 < Ref(x1, -1), Ref(x1, -1) - x1, 0);x6:= Sum(x3, pds1) * Sum(x2, pds1);x7:= (Sum(x5, pds1) * Sum(x4, pds1)) + .00001;x8:= 100-(100/(1+(x6/x7)));
{Volatility threshold calculation}x9:= (ATR(pds3) / Mov(C, pds3, E)) * 100;x10:= x9 - LinRegSlope(x9, pds2);
{Plot the indicator}{Plot the indicator}Upper + x10;Upper;x8;{Fml("Northington RSIV Fast");}Lower;Lower - x10;
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Required Capabilities
Capabilities of a VBTA Trading System
• Oversold and Overbought• Trend Detection• Broad Market Integration
S t d R i t• Support and Resistance• Historical Volatility• Implied Volatility• Multi-Timeframe Verification• Multi-Timeframe Verification
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The FrameworkCapabilities Components TTI ATR Extreme TTI Fabric SD TTI Fabric Ratio LR-SD TTI RSIV-1
Application TTI StochEx TTI Fabric LG TTI Trend Strength TTI Composite1 Oversold / OverBought
Trending x x x xNon-Trending x x x x x xTTI Trend Entry x x
2 Trend DetectionTrending x xNon-Trending xTTI Trend Entry x x
3 Broad Market IntegrationT di
Capabilities of aVBTA Trading System
TrendingNon-TrendingTTI Trend Entry
4 Support and ResistanceTrendingNon-Trending
• Oversold and Overbought• Trend Detection• Broad Market Integration• Support and Resistance• Historical Volatility TTI Trend Entry
5 Historical VolatilityTrending x x x x x xNon-Trending x x x x x x xTTI Trend Entry x x x x
Historical Volatility• Implied Volatility• Multi-Timeframe Verification
6 Implied VolatilityTrendingNon-TrendingTTI Trend Entry
7 Multi Time Frame VerificationTrending x x x
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Trending x x xNon-Trending x x x x x xTTI Trend Entry x
Volatility-BasedTrading Bands (N Bands)
N Bands are calculation of price volatilityprice volatility.
They represent an extreme level of support and resistance
h ton a chart.
When price approaches the N Bands a reversal or at least aBands a reversal, or at least a pause is likely.
Higher significance when l tilit i hi hvolatility is higher.
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Volatility-BasedSupport and Resistance (S/R) Lines
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Volatility-BasedSupport and Resistance (S/R) Lines
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Live Charts
Live Charts of Your Choice
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Volatility-Based Technical Analysis
Kirk Northington
www.tradingtheinvisible.com
www.metaswing.com
[email protected] or (910) 789-0673
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