Education
Now Reading
Class In Session
58

Class In Session

by The MoleJanuary 12, 2017

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. 

The shorter the time frame the closer people seem to be placing their stops, which of course is directly related to the visual perspective at the current time when observing for example a 30-minute or hourly chart. And that’s fine if you’re a scalper and have defined a statistically proven edge accordingly. But of course RV can still affect your campaigns in ways you didn’t expect. And those in particular can often lead to frustration and anger, both very detrimental to keeping an even psychological keel on a daily basis.

2017-01-12_silver_update

Take silver for example which we entered two days ago and yesterday I suggested that we advance our stop loss to near break/even. Now it’s quite possible that your entry was near mine, e.g. the 16.6 mark and if you trailed it with a regular stop and got taken out just before it turned on a dime and headed back higher. If that’s you then don’t feel bad – silver is a naughty and most difficult (and may I say expensive) contract to be trading and it happens to the best of us.

However there are ways I employ to protect myself against stop runners, in particular in contracts like silver, crude, and even the spoos. First up you can be more conservative and always place your stops below major spike lows. That helps but retests often drop a few ticks/pips below them. So what to do?

The Lazy Trail

The lazy trail is something I implemented into an older version of Scalpius a year or two back and it actually worked exactly as hoped in alleviating the damage done by stop runners and genuine retests. Basically the way it works is based on a timer. As soon as your stop level is reached the timer triggers and once that timer runs out (10 seconds or 10 minutes later – based on your setting) your system exits if price is still trading below your set threshold. Alternatively your timer can also be counting down based on ticks, so every time price ticks below it deducts one all the way down to zero where it finally executes. That is actually the technique I used and it worked well, especially on trend trading systems that remain active for days or even weeks on end.

The Closed Trail

The closed trail is even simpler and can be equally effective. Your threshold is only observed on candle roll overs, it doesn’t care about what happens in between. Which makes it very easy to code into an automated system incidentally. The idea here is to prevent exactly the types of shake outs that happened yesterday in silver. You may have noticed that 16.6 was touched but it never closed at or below it. And if you look at the left panel above then you’ll notice that especially silver does this stuff on a constant basis. So if you use a regular stop loss order then you’ve probably been missing out on juicy profits on several occasions in the past.

The Full Stop

Of course both of these approaches require you to set a regular stop a reasonable distance away, which is your emergency exit in case of wild market fluctuations. That can be your ISL or it can be something else – it’s up to you. Just make sure it’s a market order so that you get filled when things start getting ugly.

Finally don’t ever use any of those fancy stops for your ISL – I recommend that you only facilitate them during your campaign management, and more specifically for trailing.

2017-01-12_EURUSD_volatility

Another crucial but rarely covered topic are RV cycles and in particular sudden spikes. There are symbols which just happily chug along with the occasional spike here and there. And then there are the ones which have perfected it to a science and in the process inflict much misery and monetary losses especially on the retail trading community. Take the daily Euro for example as shown above. I have highlighted some of the wilder swings although it’s been one nasty ride here for over a year.

Now the other day I read an interesting page on the health impact of Bluetooth radiation and learned that it’s actually the rapid rise and fall times and the rate of change of the fields that inflict most of the biological damage. Wait a minute – what do Bluetooth pulses have to do with trading the Euro again? Well, absolutely nothing except that the Euro currently behaves like a giant pulsar. Not only does it change direction erratically and for no (apparent) reason, it also suddenly starts trending (as shown by the compressed bands in the lower panels), only to suddenly start flailing around again. But it’s the sudden phase changes (the changes in volatility) that really get you and is guaranteed to smash most trading systems into smithereens. If you’re trying to scalp then the trends will shoot way past your mean reversion zones, and if you’re trying to trend trade then you’ll be suddenly whipsawed to death.

There are three simple lessons here to be learned:

  • First up – train yourself to recognize symbols like that as in most cases it’s advisable to just stay away. You can use an ATR and just wrap a Bollinger around it.
  • Secondly only trade those symbols near long term inflection points, meaning support or resistance. On the EUR/USD that’s currently around 1.03 all the way up to 1.14.
  • Thirdly – if you’re scalping watch volatility like a hawk and try to avoid it. Symbols like the EUR which pulsate are actually tradeable during low volatility trending cycles. If you’re nimble enough to catch them that is.

2017-01-12_YM_update

Alright, quick update on our Dow futures campaign. If you were a sub you should be in this one. We actually barely escaped a stop run on this one as well (even with a regular stop) and I think I’ll be leaving the ISL in place for now. If it takes off then it should happen soon – recall that Monday is MLK day so we’ve got today and a few morning hours tomorrow before everyone calls it a long weekend.

One more setup below the fold:

evil_separator

It's not too late - learn how to consistently bank coin without news, drama, and all the misinformation. If you are interested in becoming a subscriber then don't waste time and sign up here. The Zero indicator service also offers access to all Gold posts, so you actually get double the bang for your buck.

Please login or subscribe here to see the remainder of this post.


About The Author
The Mole
Mole created Evil Speculator amidst the chaos of the financial crisis in early August of 2008. His vision for Evil Speculator is a refuge of reason, hands-on trading knowledge, and inspiration for traders of all ages and stripes. You can follow him and his nefarious schemes at various social media waterholes below.
  • Tomcat

    Good morning folks. Long $AGN here

  • ridingwaves

    little bit of risk being shoved off table….gold above 1200…reflation trade is going to bumpy me thinks…shake outs thru-out the move…

  • Ronebadger

    VIX up 11%!!! Worm turning?

  • Yoda

    Sell signal in Dow triggered. I am piling into SDOW.

  • ridingwaves

    NG shake out last week brutal, this week blast off
    widow maker an apt name…

  • http://gerb-reloaded.blogspot.com/ Gold_Gerb

    it’s just ‘one day’.
    but that’s the way to bet.
    😉

    http://cancungreatvacations.com/cgven/wp-content/uploads/2016/08/mezcal-worm.jpg

  • OJuice

    After all the chop yesterday definitely a nice little gap down this morning. Could definitely have some potential.

  • http://gerb-reloaded.blogspot.com/ Gold_Gerb
  • Yoda

    nice catch

  • Yoda

    It’s January after all 😉

  • http://evilspeculator.com Sir Mole III

    Equities officially running in circles now. We may have to call it a week early…

    https://uploads.disquscdn.com/images/29d6cab333fa325fecfe5db77118d43971e0f4f1d69087ac980e59a00a2a364f.png

  • ZigZag

    Good stuff on stops Mole.

  • Yoda

    any sub got the trend day alert in their e-mail today? I haven’t

  • Yoda

    nevermind, just got it

  • randomuser6789

    What a great post! Thanks, Mole.

  • StockTalker

    Taking some profit /CC, holy chit

  • StockTalker

    Want to see VWAP fail for short confidence.

  • StockTalker

    2260 back test

  • Grant

    Nice to see some RBT rules being covered here. Good info Mole. IMO, it is important to know how to realize a volatility spike (which 70% of the time is a capitulation of longs or shorts) and be able to enter systematically at the capitulation so that one may realize the benefits. Funny you referenced the Eur.Usd pair above. It is coming out of a long term consolidation and may be trending on the daily-weekly-monthly bars soon.

  • http://evilspeculator.com Sir Mole III

    Glad you enjoyed it.

  • http://evilspeculator.com Sir Mole III

    Pass it on! 😉

  • http://evilspeculator.com Sir Mole III

    The problem with those is that many times you get your ass kicked during a trending phase. So what you can do for example is to step down into a faster timeframe and look for an RTV-S or some other type of reversal pattern. Then enter and build up your position as it goes your way. Or take your first stop out and wait for the next opportunity. Clearly you won’t be taking 1R positions like this, more like 1/3R and then another 1/3 if the first entry crosses the distance in ticks of your stop. So if your stop was 20 ticks away then wait for a 20 profit MFE and then add the next 1/3R whilst moving your stop to break/even. That’s just one example of how to scale into a campaign reversal traders should be familiar with.

  • Billabong

    Great post Mole … always good to have refresher training with new ideas to boot.

    A classic directional bias trade – “Soros Lost $1 Billion Following Trump Election”.

  • http://evilspeculator.com Sir Mole III

    Couldn’t have happened to a nicer guy 😉

  • http://gerb-reloaded.blogspot.com/ Gold_Gerb

    ..approaching $1 Billion
    and while we may scoff, we do not know what the assessment was in terms of risk/reward/probability.

  • Yoda

    or the monetary value of 1 R

  • OJuice

    Wood chipper day 2. I got a sell signal this morning, but, it looks like the trade might get closed out in the same session.

  • StockTalker

    signal barely flinched

  • BobbyLow

    Afternoon folks, been out all day and missed a lot of churning and burning in the markets today and that’s probably a good thing. I think Mole mentioned that one way to use stops is to know what price your stop is going to be and execute only if that price is there at the CLOSE of the candle within the time frame being traded. I’ve found that this method works best for me. I’ve been stopped out way too many times in the middle of a candle only to have price turn around before the close of said candle.

    This morning was a prime example of this as my weak ass short of crude had a stop at above $53.35. Crude hit a high of $53.50 during the morning candle. I was at my doctors office waiting room when the candle rolled to the next one (TG for smart phones) and although price had hit $53.50, the candle actually closed at $53.14. I knew I would be home for the next candle close so the trade remained alive and still is.

    The bottom line is that this trade feels like a loser and I’ll probably get stopped out tomorrow. But my stop still has to be confirmed via ATR and BB’s before it is exercised. However, my gut feeling has nothing to do with execution because my rules have proven to be more reliable than my gut. :)

  • Mark Shinnick

    Yeah…very well described.

  • Mark Shinnick

    Ok, so this morning’s short miners closed out for the time being, remaining short tza.

  • StockTalker

    Market taking many prisoners today

  • Mark Shinnick

    Reentered short miners.

  • Grant

    Bobby, how much leverage and what TF? This could be deadly if handled during a Fed Speak moment.

  • Yoda

    Actually that would be no prisoners. Bots are in charge of the tape and will push it whatever direction they want to. It is impressive to see the dislocation between the tape’s direction intraday and market breadth.

  • ridingwaves

    He kinda looks like a Uranian and thus his mouth/motives came from his Uranus upbringing….maybe he can head back there and help save earth from the likes of him…

  • Mark Shinnick

    Bots are the masters of the majority of market trendless time….when liquidity might not otherwise be as good w/o them.

  • Billabong

    If $30B is the asset base – already approaching 3.5%. It would be interesting to see his model parameters.

  • Billabong

    I haven’t seen anyone discuss HG. It’s on lift off phase … without me unfortunately.

  • ridingwaves

    ok, the top is almost here….:) just snarky
    Nevada casinos turn profit in fiscal 2016; first since 2008

  • Billabong

    How did the doctor’s office blood pressure check work out? 😉

  • Yoda

    Bots are actually killing liquidity, but yes they are the masters of the tape.

  • Billabong

    Longer time frame (daily), GC / SI still looks good for the continuation of an upside move unless there is a pre-mkt slap down. With an investigation underway (thanks to DB), the slap down folks may lay low for a few months….

  • Mark Shinnick

    I guess you mean they are responsible for the general lowering of participation?

  • BobbyLow

    Still stalking the Russell but it’s been in total slice and dice mode since December 14th. It just doesn’t want to give up the ghost. Oh and BTW, I know that the DOW 20,000 doesn’t really mean shit but just in case, can we get a Daily Close above 20,000 so we can move on?

    I remember the “excitement” about Dow 2,000 and then Black Monday happened in October 1987 and we had a 500 Point correction. Then each 1,000 point increment was celebrated after that even though every subsequent1,000 points rise was actually a smaller perentage increase than the previous 1,000 point increase.

    But the last grandaddy of them all was on March 29, 1999 when the Dow closed above 10,000 for the first time. They were all wearing Dow 10,000 hats on CNBC and Bob Pissssani was as gleeful as could be. Of course back then the Dow had reasonable 5, 10, 15 percent or larger corrections after large run-ups. Sizable corrections were considered healthy for the markets back then.

    But institutional free money has changed all that I guess. . .

  • Yoda

    Yes, look at how the volume decreased since 2009

  • BobbyLow

    Just a routine exam. BP was good because I hadn’t stopped out. :)

  • Yoda

    and bots too.

  • BobbyLow

    I don’t have the balls or the staying power to trade /CL for a possible medium term swing trade so I chart /CL and trade 2X UCO and 2X SCO for Crude. I just figure out where my aproximate Stop Out would be on the intitial trade and add a little fudge factor to account for potential Gap Risk. Then I calculate my size based on what my R is.

  • saltwaterdog

    In what, SPY? Futures?

  • BobbyLow

    Well something has killed volume. Just a few short years ago SPY would average 250,000,000 Shares traded every single day except just prior to Major Holidays like Christmas etc. Look at today’s volume of Apx. 72,000,000 Shares. That’s only slightly above what volume would have been on a 1/2 day of trading on December 24th back when I first started in this nutty game.

  • saltwaterdog

    long weekend ahead. Bigger picture, SPY volume is lower than the days of 08/09 when we got massive intraday swings but those years were massive outliers. SPY traded 76bn shares in 08, and 62bn shares in 09. but in 07? 39bn. 2006 17bn. We’ve been pretty steady in the 30bn range last 5yrs.

    one consideration is notional ($ value) of volume. in 2010, with SPY about 1/2 what is now, you’d have to buy 2x as many to get a given $ exposure. if you $ weight what is trading I think you’d get a different answer.

    Finally I’d point to sector ETFs… .as these have proliferated and have drawn in liquidity, it is plausibly taking some volume from broad benchmark indices into sector-specific ones that are a better fit.

  • BobbyLow

    Notional Value and the proliferation of Sector ETF’s that we didn’t have in the late 90’s and early 2,000’s can explain a lot of the reduced volume of spy. These are excellent points and things that I hadn’t considered.

  • Yoda

    SPY is a good example

  • Mark Shinnick

    In just my case, I used to trade thousands of SP future contracts per year and millions of rydex and profunds SP long/short and SPY shares. Nowadays, its never SP or SPY, but usually only the 3x and 2x volatility and miners,and tza because their ranges and moves are far more capital efficient, and computers made it all workable. Still, the pits are closed, the middle class has contracted, but has the overall dollar volume of all trading also contracted? Has it also been trapped into bonds?

  • BobbyLow

    I would only be guessing if I tried to answer the last two questions.

    But when I first began trading back in 1998 I used a broker. The Tech Bubble was born and the more I got into it the more I believed that I could do as well as she did and not pay $200 or $300 per trade. So by 1999, I actually bought my first trading book and it was called “Day Trading” for Dummies”. What the book didn’t say was that you needed to be a dummy to use anything in this book to trade. But ignorance was bliss in my case and I got lucky with Tech by being at the right place at the right time. A lot of people that I knew at the time were trading because all you had to do was throw a dart at anything tech and make money. I definitely believe there were a lot more people trading back then than now. After the tech bubble burst most novice traders got cleaned out and the rest of us went into a life long learning curve. :)

  • http://evilspeculator.com Sir Mole III

    Well, I’m always following every symbol but if there’s not apparent entry it’s not useful to mention it on the blog. I know how you feel – sucks watching symbols launch off like a rocket without being able to hop on.

  • http://evilspeculator.com Sir Mole III

    Complex subject. It’s tangentially responsible for lower retail participation, yes. First retail trading has become more treacherous and secondly the exchanges stopped caring about retail and catered almost exclusively to HF shops. It’s proving to be a myopic strategy however as you can’t just have bots trading against each other. Well, you can but they are starting to cancel each other out. There is a thing to be said about having a ‘real market’ with ‘real people’ not competing on a micro second basis.