I’m going to cover two important topics today which both relate to realized volatility (RV) and in particular how to trade your way around it. If you’ve been a trader for a while then you probably have noticed that volatility profiles differ substantially on the short term when compared with the long term. In essence volatility has a tendency to decrease toward the long term. Nevertheless many traders treat those charts the same when designing their systems, e.g. how and where they enter, where they place their stop loss, and how they handle campaign management.
While I am taking some time off I thought I may as well repost some of popular educational posts which many of you may not have seen or completely forgotten about. The first one is from early 2012 and covers volatility and kurtosis:
If you run the math you will find that on a daily basis – annually – the skew is close to normal, and but KURT (i.e. kurtosis) is large. That is due to compounding error of the VIX distribution and overlapping seasonality data. But nothing is black and white – I believe in conditional statistics and offsetting tail distribution. Common sense tells us that when the VIX is > 25 the market will exhibit a different distribution [...]
Over the weekend I had a bit of time to reflect on the past year or two, and in particular how increasing randomness and intra-day volatility has affected market sentiment as well as participation right here on the blog. Quite obviously the comment section has become noticeably quieter with less active participants and more sporadic discourse, especially compared with just a few years ago. Which in my mind is a clear sign that more and more retail traders have been relegated to the sidelines; either by their own choice or by being forced out.A Market In Flux
As a financial blogger I have the dubious pleasure of talking to quite a few traders across the gamut on a daily basis [...]
Let me go on a limb here and flat out state that most of what you have ever learned about being a trader has been completely wrong and may actually be counter productive to you being successful. There I said it. An entire industry geared toward selling you expensive trading books and weekend seminars in exotic locations in essence has but one goal in mind: To separate hapless retail fools from their hard earned money. And a profitable business it is with a never ending line of suckers standing ready to take their turn. There is never a lack of people looking for easy solutions to complex challenges, which is an affliction which obviously extends far outside the trading [...]