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Stop Focusing On Price
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Stop Focusing On Price

by The MoleOctober 13, 2015

I sense that some of you are struggling with the fact that the tape is pushing everyone’s buttons right now. But quite frankly things couldn’t be any more clearer at the moment, assuming you know how to understand the market’s language. In order to do that you must detach yourself from focusing on variations in price and instead focus on volatility. If your time traveling pal from the future is kind enough to send you the closing price of next week you may still find yourself losing (i.e. being stopped out in the interim). Because how we get from a to z makes all the difference – in life as well as in trading the market.

In physics we differentiate between speed and velocity. In case you snoozed through that particular lesson allow me a quick refresher. Speed only measures how fast you move whilst velocity has a directional component. An airplane moving toward West at 300mph on average has a velocity of 300mph – it also has a speed of 300mph. An airplane circling an airfield at 300mph has an effective average velocity of zero but it still moves at a speed of 300mph. A very simplified formula for measuring those two variables are:

Average Speed = Distance Traveled / Time Of Travel

Average Velocity = Displacement / Time

2015-10-13_spoos_darthmole

With the exception of certain option strategies (e.g. condors, straddles, strangles) monetary reward in trading usually relies on price displacement. So it is natural that everyone always focuses on price changes in other words we become obsessed with velocity . However by doing so you are not seeing the forest for all the trees. The key to understanding market behavior and thus assessing probability of outcome as well as risk lies in assessing and adjusting to volatility cycles, which relate to speed. Both speed and velocity describe market cycles. The higher the ratio between velocity and speed the more trending is the current market phase. The lower the ratio (with speed outweighing velocity) the more sideways the market. Speed can be predicted to a certain extend – but the ratio between those two cannot.

Like an automobile on a road trip the market shifts between low speed and high speed periods. What complicates matters is that speed does not necessitate a strong directional component. In other words – we may be moving at high speed but our relative velocity may be slow. Had I told you on 8/20 that the spoos would be trading at 2006 today then that information would have been relatively useless. Yes, you could have bought some futures and held them all through today but it’s possible that margin would have bit you in the butt somewhere on the way down.

If you look at the orange box, there are things I would like you to focus on. The first one is price of course – very directional and fast. The second is the volatility signal on the daily DarthMole which shows a veritable explosion after a long period of sideways churn. After that look at the blue box – price is still moving fast but things are slowing down now. So what market cycle are we in? Clearly compared with the prior weeks volatility is very high but *relative to the current market phase volatility is depleting*. This is an important realization, wouldn’t you say? When folks refer to high or low price volatility then you should ask ‘compared to what?’

The red box shows us a nice trending move to the upside but on the volatility end we are pretty much where we were in the previous box. And relative to what the market did a few weeks ago volatility is still sky high. What we learn from this is the following:

  1. Volatility is always relative.
  2. Market cycles happen in all volatility stages (i.e. trending, sideways, corrective, etc.).
  3. Future volatility is only predictable near its extremes.

The current tape is a great example. The standard deviation bubble shows us that we are near the lower range right now which means that we may see acceleration here soon. Of course making things a bit trickier is that we are already in a high volatility range so there is plenty of room toward the bottom. Meaning we could just plot sideways here for a few weeks or we could slowly climb higher here whilst volatility is slowly depleting. I know that is a bit of a mind bender in the beginning but realize that an orderly advance is usually accompanied by depleting or sideways volatility. Only sudden fast moves extend volatility readings – i.e. long candles.

The volatility cycle was quite a bit easier to predict when things were gyrating sideways during the summer season. Every time volatility was dipping toward its lows odds suggested an acceleration was on the books for the near future. As of right now what we do know is that volatility is high and most likely won’t return to summer readings in the near future. Therefore we should always expect fast moves in either direction. And that means we keep our stops loose and take little risks. Most people do the opposite – they play small or stay out during little moves (i.e. the summer months) whilst making big bets during high volatility periods. Which of course results in major losses over the long term.

So I ask you – what really is the difference between participating in range bound markets and trending markets? I’m glad you asked!

  1. Low volatility range bound markets are actually most predictable. This permits you to play larger position sizes and keep tighter stops.
  2. High volatility range bounds markets should be hould be traded via small position sizes and wide stops. Otherwise you will most likely just wind up being thrown off the horse.
  3. Trending low volatility markets on the other hand are a trend trader’s manna from heaven. You pick your spot and are able to choose a stop a reasonable distance away (e.g. 1 stdev or the recent spike low/high).
  4. Trending high volatility markets – well, anything can happen but if you manage to get a seat on the bus even a small position size can bank you some handsome coin. Therefore you trade them like high volatility range bounds markets.

2015-10-13_spoos_LT

Let’s just consider how the current move fits into the general market cycle which is observable (to some extent) on any chart you have ever looked at. We are slowing down a bit right now as we are touching important weekly/monthly inflection points. We do know that volatility is still high and it has not dropped low enough to assume that it can’t drop any lower. But let’s not forget – volatility does not have a directional component, it only shows us the speed at which we’re moving.

We are at an inflection point and in terms of speed we need to allow for another fast move for the foreseeable future. At the same time we are currently either at the tail end of a directional period or are about to enter its final blow off phase. So the odds of a higher volatility sideways or trending period are high. I said higher – and not high for a reason however. Remember, it’s all relative and volatility cycles should always be considered in context.

2015-10-13_spoos

And all that is good information. The fact that volatility may expand again works for us if we get a fast move and we grabbed a seat on the bus. As we are near an inflection point depleting volatility will also help us IF we start trending (down or up). The only situation that won’t work well for us near LT inflection points is a sideways low volatility trading range. It’s always a possibility of course and there is no predicting this.

Given all this I am currently long with a stop fairly close by below that 100-hour SMA where I think the rubber meets the road. If proven right I will leave my stop there for a while as I want it to be loose to sustain stop runs. I am going to watch the Zero like a hawk to make sure that momentum/participation supports price in either direction. My concern right now is to play a possible outlier move which means I keep my position sizing small. At least for now – things may look different in a few days if we haven’t progressed in either direction.

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.

Cheers,


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.
  • ridingwaves

    Volatility sucks up leverage when it’s high, thus it reinforces whatever move it makes (usually lower)

    europe off 1.5% but go USA…

  • Huey

    Like the analog of speed and velocity. Nice post.

  • Billabong

    Excellent post mole! I added a few notes from it to my trading book of knowledge. I appreciate your thoughts on looking at the market from a different perspective.

  • Billabong

    Calling a market top:

    Now selling at the checkout counter: breath mints, hand sanitizer and…$25 of Berkshire Hathaway stock?
    In a new twist on the bustling gift-card business, retailers such as Kmart and Office Depot this week are starting to roll out cards that give the recipients small amounts of stock in some of the country’s best-known companies. The cards will be available ahead of the holiday shopping season at other retailers, including Safeway Inc., Toys “R” Us and Lowe’s Cos.

  • HeadNShoulder

    Good morning Boss, it’s been a while since my last appearance. Went into holiday mode and spent a good 5 weeks in China.

    Been working on Sqn numbers lately base on the past resultson different accounts and would like to ask a silly question, is 6.75 a silly number or typo? results base on 66 trades.

  • Huey

    Mole has said above 3 is excellent, so 6.75 is a little suspicious. What inputs are you using for expectancy and standard deviation?

  • HeadNShoulder

    All calculation base on http://evilspeculator.com/tools/concepts/.

    And yes I agreed it looks very suspicious.

  • Huey

    I just mean to get a number that big you must either be using a big expectancy or really small std dev

  • BobbyLow

    It might be correct and would be an A+ Rating. Is the 6.75 the SQN or the SQN100? Having a low SD, and High APE will acheive a relatively high SQN.

  • ridingwaves

    popularity of said cards may be tiny, the sheeple want their gift cards to spend on junk….not invest….

  • evilasevildoes

    Dumb question when red and green bottom indicator opens up like a jaw what dies that mean?

  • ridingwaves

    today is exactly why I hate shorting earnings season….low volume recovery from sell offs are the norm…

  • HeadNShoulder

    Hello Bobby! Ok here’s the breakdown:
    Average profit 0.0769
    Average Loss 0.1348
    Stdev 0.08480
    Number of Trades 66
    Expectancy 0.07049

  • BobbyLow

    OK. Something doesn’t add up here and for one it’s your Expectancy. I’m assuming that what you’re saying is that your expectency is .07xxxx R per trade. My APE right now is at .2455 and that’s not great by any means. But an expectancy of .07R per trade would not add up at all.

    Expectancy = (probability of win * average win) – (probability of loss * average loss). I prefer to say (Percentage of wins in decimal form * average win) – (Percentage of losses in decimal form * average loss)

  • ridingwaves

    Skew is thru the roof…what is going on here….mole, your take…

    http://s24.postimg.org/ih8823u6d/SKEW_index.jpg

  • tradingmom

    Thanks for asking. There’s a ton of chatter out there about the skew/vix discrepancy.

  • germatrix

    absolute brilliant post – been out for past two days, so not watching the markets. system is primed.
    Stopped out based on my plan posted on Scott’s post. But stopped for the better.
    I now have a new position – cash. Waiting and scouting for the next gobble.

    Love the backed evidence given Mole – brilliant!!!!

  • Round we go

    dr. copper does not look good. maybe it is coming down with a flu.

  • ridingwaves

    the highest ever reading….spy blocks are selling on strength today…

  • RoastBeeph

    Do certain big sellers know something we don’t know?

  • tradingmom

    No — they just move more money than we do :-)

  • ridingwaves

    XLF is bleeding with JPM earnings after the bell…

  • tradingmom

    For zero subscribers — watch the downtrending channel of the ZL signal for turn clues / trend changes.

  • BKXtoZERO

    longer term worry despite shorter term complacency

  • HeadNShoulder

    Hmm, ok here’s the expectancy breakdown:

    probability of win = 96.97%
    average win = 0.0769 R

    probabiltiy of loose = 3.03%
    average loose = 0.1348 R

    Expectancy = (0.9697 * 0.0769) – (0.0303 * 0.1348) = 0.07049 ?

    Stdev 0.08480
    Number of Trades 66
    So, SQN = root(66) * 0.07049 / 0.08480 = 6.75 ?

    Or was it the issue with stdev since I am basically just using the formula “=stdev(S5:S70)” where S5:S70 is the column where the Return is being calculated base on the balance of equity.

    Thanks for the patience Bobby

  • CandleStickEmUpper

    ZL looking good for shorts at the moment

  • saltwaterdog

    just two losing trades in 66 taken?

  • http://evilspeculator.com molecool

    Zero signal right now….

    .

  • http://evilspeculator.com molecool

    That dip down in the morning clearly was a fake out – textbook. Right now we are painting a small divergence. Let’s see if it maintains…

  • tradingmom

    There’s a 5 min megaphone on SPX — I can’t quite pinpoint support because its below where the numbers stop on my chart. I think around SPX 2000…

  • RoastBeeph

    Yeah, that is a pretty clear divergence, not a huge divergence but definitely looks like one. And look at all those arrows.

  • germatrix

    Apologies to the crew, has anyone seen my kryptonite aka Skynard?
    you still OK buddy?

  • HeadNShoulder

    That is correct, hence the very small average win of 0.0769 R

  • tradingmom

    Now we are at the lower band on the 5 min. This is where I start to watch the lower mole bubble for early hints of a reversal.

  • germatrix

    Jip seeing some MA crosses on 1 hour(technical weakness) – not taking the trade at this point…

  • http://evilspeculator.com molecool

    He was warned after rude comments and thus decided to cease posting.

  • http://evilspeculator.com molecool

    Okay, this spike low is probably the last chance for the bulls to take it home today.

  • http://evilspeculator.com molecool

    Chart….
    .

  • http://evilspeculator.com molecool

    If we drop through this spike low then we’ll go all the way. So this is an excellent spot to get positioned.

  • http://evilspeculator.com molecool

    Meaning long right now – short if we breach below the SL.

  • germatrix

    Thanks for clarifying Mr Mole

  • http://evilspeculator.com molecool

    I have seen many people come and go here over the years. Everyone has their own agenda and their own path. The best I can suggest is that you focus on yourself and take away as much as you can while you can.

    May I also point out that our collective goal here is to produce autonomous traders. Use his absence as an opportunity to further develop/refine/perfect your own system/approach. The information I posted today should be appreciated as a valuable tool in your trading arsenal. I doubt that you will find such in depth explanation of volatility on any other trading blog. Especially for free.

  • http://evilspeculator.com molecool

    EXACTLY – he gets it.

  • http://evilspeculator.com molecool

    I’m sorry but 96.97% – is very doubtful. What sample size is that?

    If these numbers hold water then I fucking trade it 😉

  • RoastBeeph

    I really appreciate the teaching articles you’ve posted the past few days. That is what I am looking from this site (along with the ZL indicator, of course).

  • http://evilspeculator.com molecool

    Aaah – earning season – when retail rats think they can somehow beat the market by gambling on stock symbols with mostly fractional/manipulated/cooked information. Great time for market makers – the woodchipper is running in fourth gear.

  • http://evilspeculator.com molecool

    Look at the goodies page – over the years I have produced a boat load.

  • RoastBeeph

    I’ve watched several of the older videos that people pointed me to. I will look through the historical articles as part of my weekend homework. Tons of info, which is great.

  • germatrix

    Thank you Mole,
    Not in the habit or looking to replace someone. I do believe though in contribution in a positive manner.

    In this regard I believe put down your case. At least then it can be argued or disputed.

    I will put forward my best effort to contribute, but will never try to replace others.
    I will though challenge where I feel that potential harm may come to the less informed – I teach not instruct

    Respect to the forum

    Gerhard

  • CandleStickEmUpper

    Thanks. The left side bottom chart has dipped below the 0 line

  • HeadNShoulder

    Base on 66 live trade results. Started on September but due to platform issue and fine tuning I didn’t use results from that month. No simulation trades being executed before. (similar to one of Scott’s trading system where he started off live instead of running simulations if I recall correctly)

    I am a bit doubtful on the standard deviation formula that I use in google spreadsheet.

  • germatrix

    Seeing a drop to 1985 on daily as target 1, but I am not convinced yet – oscillators showing potential…. but wary at this juncture…

  • http://greenlander1.blogspot.com/ Greenlander

    Long SDS 1/2 position based on my system’s daily + 1 hr timeframe. Stop 202.4 in SPY

  • RoastBeeph

    SDS is inverse, right?

  • http://greenlander1.blogspot.com/ Greenlander

    Yup

  • http://greenlander1.blogspot.com/ Greenlander

    Also got a buy signal on daily in VIX which helped this set up.

  • RoastBeeph

    Thanks. I went short about 5 minutes ago, targeting ES 1987 for today, not sure we will get there.

  • BKXtoZERO

    I admired Skynard for a number of reasons that kind of resonated with me and will miss him (if he stays away). He was brash, confident, aggressive etc…. which can be bad, especially for non skilled folks that can’t pull that off. He posted to me that he got tired of leaving money on the table by seeing moves and not taking them etc. That resonated the most with me combined with the main theme here of not having a bias. Mostly because my bias stopped me from taking so many moves that I saw plain as day in years past and stayed with a bias that ruined me. He was able to be bull/bear and milk blood from a stone. He tried for every single wrinkle which I get was perhaps not wise but I followed much of what he was saying to look at charts and learn for myself to try to see what he was seeing. Maybe subconciously, some of his bad habits perhaps resonated with me as things I used to do. Besides being cranky, there were certainly things one could learn from him.

  • RoastBeeph

    I’ll miss Skynard too, but it is what it is. :) Hopefully he comes back at some point.

  • http://greenlander1.blogspot.com/ Greenlander

    Yeh 2008 has held twice already so this might not work today.

  • BKXtoZERO

    I pasted today’s post into my own file (in case you follow up your threat and disappear some day) ;-( I have a Scott file too.

  • Round we go

    longterm rwm for me. its really a hedge against a townhouse I own.

  • RoastBeeph

    Mole, are you the sole programmer of the ZL indicator?

  • germatrix

    Short potential on daily
    1. Stoch RSI cross
    2. RSI turning down
    For me not enough evidence to go “full” short yet 😉 but tempting…

  • mugabe

    amazing

  • http://greenlander1.blogspot.com/ Greenlander

    Just broke 2008 and its channel. Still chance of rebounding though.

  • RoastBeeph

    If Intel and J.P. Morgan come out with bad earnings, this could really sink. The market is just looking weaker and weaker into the close.

  • ridingwaves

    The woodchipper always runs but earnings season is especially brutal for the subjects you discussed in velocity and volatility…
    gambling on stock symbols is not hard unless you like those 550.75 PE stories..

  • tradingmom

    I hear what you are saying, but one of the things that Mole and Scott really try to stress around here is that the news is really just noise. Think about all the different ways the news media can spin earnings, plus the fact that all the books are cooked and accounting is all screwed up ever since the spring ’09 rule change, not to mention the whole “bad news is good news, bad news is bad news, wait, what is bad news today?” situation…just stick to the charts.

  • RoastBeeph

    Yep, I am so used to the market rebound strongly to close the day that I am almost expecting it at this point.

  • RoastBeeph

    No, I understand, and agree. And it’s possible people might already have an inkling that the earnings will be bad which could be causing part of this sell off. Who knows.

  • http://iberianviews.blogspot.com/ catracho

    S&P cash tagged target…
    now to see what happens..

  • saltwaterdog

    From the #s, you’ve made 4R on 64 wins. Is it possible you’re managing to produce an optimal Win/Loss Ratio? It seems that the # of entries that achieve 1R is very low, correct?

  • BobbyLow

    No problem. So this must be a very high probability of win with low $amount return scalping system. For example if your R is $1,000 then your average win would be (.9697 x $76.90) and your average loss would be (.0303 x $134.80) and Average Positive Expectancy in Dollars would be $76.90 – $4.84 = $72.06.

    These numbers lead to an exceptionally low SD which if all these numbers are correct would make your high SQN possible.

  • mugabe

    that’s a good point but it seems to be 4R since beginning October – very good. and the higher the win rate, then probably the higher you can make R (especialy as losses are small)
    the main issue might be trading costs.

  • mugabe

    I think news can definitely move markets – I think that’s obvious. But it’s equally obvious that there’s nothing you can do about the news – unless you know it beforehand!

  • ridingwaves

    that started yesterday though market was green, the block selling was masked brilliantly…

  • tradingmom

    The support I was looking for…remember, this is only a 5 min chart.

  • RoastBeeph

    Bounced right off that line like clockwork. ES continuing to slide after hours for now.

  • evilasevildoes

    or write it

  • http://evilspeculator.com molecool

    The less attention you give all that noise the better you will trade and sleep.

  • http://evilspeculator.com molecool

    Yes.

  • evilasevildoes

    ,,,,,,,,,,,,

  • http://evilspeculator.com molecool

    Good participation and commentary today. This was a tough day and you all did pretty well.

  • HeadNShoulder

    That is correct, and tiring (not a single one achieve higher than 0.4 R). But I want to see how far can this goes before setting a specific goal for certain timeframe. Say 2-5% return in a month etc… still brainstorming.

  • CandleStickEmUpper

    Agreed. News delays the eventual course of the market due to unnecessary reactions

  • Scott Phillips

    Some people seem to think his “calls” were good. I don’t. “market calls” tie you into a fixed version of the future, making trading harder. Also it exacerbates drawdowns since when you go on tilt things get worse and you dont realize,

    NOBODY actually measured them objectively, and the evidence is that even Skynard didn’t himself.

    When someone is questioned on the profitability of their method and they come back and say “I run at a constant 55% win rate with .2 expectancy” then you have some information.

    When someone says “my method is aggressive and not for everyone but is highly profitable” it is a reasonable assumption that they don’t keep records and don’t know how good or otherwise it is.

    I call bullshit

  • Billabong

    JPM Missed numbers across the board … financials. SPX in large channel (1870 – 2020) since breaking below 2000 on 21 Aug. And MOMO indicators look like it’s rolling over again to the downside.

  • Billabong

    Going into close, miners were making new HOD … got GC?

  • AcoBrasil

    Mole’s 1998 SL level on ES has worked out brilliantly. Holding as resistance so far this AM.

  • tradingmom
  • tradingmom

    I saw this floating around last night…I’ve never used the 76 week moving average, and I’ve never used moving average envelopes before, but I thought this was an interesting chart. SPX weekly — 15 yr.

  • http://evilspeculator.com molecool

    ( ( ( ) *
    ) ) ) ) ) ) ( /( ( ` ( * )
    (()/( (()/( ( (()/( )()) )))( ( ) ` ) /(
    /(_)) /(_))) /(_))((_) ((_)() ) ((((_)( ( )(_))
    (_))_|(_)) ((_) (_)) _((_) (_()((_)((_) ) _ ) (_(_())
    | |_ | _ | __|/ __| | || | | / || __|(_)_(_)|_ _|
    | __| | /| _| __ | __ | | |/| || _| / _ | |
    |_| |_|_|___||___/ |_||_| |_| |_||___|/_/ _ |_|

  • http://evilspeculator.com molecool

    Which one?

  • AcoBrasil

    The one you posted below yesterday on the 1d 5m SPX ES.