Volatilty Zones

May 24, 2012 · Posted in Volatility Zones · Comments Off on Volatilty Zones 

Volatility Zones

Market Volatility refers to uncertainty or risk in the markets. Traders use Volatility to measure the changes of security price and act accordingly to control the risk. In calmer markets, Volatility will shrink as lesser price changes occur and in a volatile markets prices expand more rapidly. Most traders like to know and look for signs of Volatility expansions or contractions to limit their risk. Prices changing in volatile periods in a short-amount of time is credited for most traders losses.

Most savvy traders favor Volatility as they understand how to use it for their own advantage. In my view, volatility is also biggest reason why most Intraday or short-term traders lose money. In High Volatility conditions, short-term traders are wrong both sides of the trade (Long or Short) since price move rapidly in both directions. Hence, they find various methods to detect the Volatility or emergence of Volatility to understand their trade setups or avoid trades during high volatility zones.

I have designed a volatility indicator (suri.VLTY) to identify these volatile periods and plot them as Volatility Zones. These zones show how and when volatility is expanding and contracting. When I want to trade a pattern or a setup, I constantly check with VLTY and confirm a tradable condition for a trade. For my trading, I prefer VLTY to be trading in the mid range (25-50). When VLTY is above 50, I try to not enter a new trade, it does not matter how great the pattern setup is. When VLTY is above 100, I will exit out of my trades LONG or SHORT and stay out of the markets until VLTY gets back to normal range (<50). VLTY has VOICE alerts and alert once per bar when VLTY is exceeding Risky limits (50) and Extreme Risky (100). Usually in high Volatility conditions Market Internals also move rapidly and in my view they may not provide any usable information.

Test of Patience — Dragon/Double Bottom/ABC Bullish Trade in NQ

May 2, 2012 · Posted in ABC Bullish, Double Bottom, Dragon · Comments Off on Test of Patience — Dragon/Double Bottom/ABC Bullish Trade in NQ 

Test of Patience — Dragon/Double Bottom/ABC Bullish Trade in NQ

Today markets sold off from the overnight High of 2753 in Nasdaq futures to a low of 2702.5,
with 11 pt Gap Down. Usually when markets either Gap Up or Gap down big (>20 pts in NQ or
6 pts in ES), I make a note of it to trade only in the direction of the gap all day. In my view, unless
the Gap is filled (on the same day), market is NOT reversed. Hence, I monitor Gap Ranges
with Gap Fibs. tools very closely to understand the Market Dynamics.

From the open, NQ and ES attempted a weak rally to 2718 (10 pts) until 10am and sold
off again pretty quickly. Usually this is a good short-setup below the Open level. But I started to see
hesitation in the TickStrength (NQ) and started printing reversal bars from the bottom….
Even then I was quite skeptic if it is a double bottom pattern. It also fits into a Dragon Bullish
pattern. So, I connected the Top of the Head to the Hump Level to visualize the Dragon
setup. Around 10.40am, I have also seen CMI turning Green. Once price closed above 2710
(the Intersection of TL connecting Head and Hump levels), I have decided to enter a long,
kinda half-hearted. I am still biased on the short-side due to overnight
(Globex) down session. I figured Dragon/Double Bottom is pretty decent trade setup. Also,
ABC Bullish setup with Long trade above 2709. Long 2711 with Stop at 2702 (low of the two legs
in Double Bottom). Targets are kinda tricky in Dragon pattern. The best is to trade with trail stops.
I enter Trail Stops only after my 1st target is hit around 2720. Then I move my Stop to B/E of the
entire lot to protect my trade. In my view Dragon’s differ from the Double top and Double Bottom
trading in few aspects. I’ll attempt to write that topic in another blog post.

Here comes the patience part., Usually I struggle with it but today I was
quite determined to see my targets or my Stops get hit, if I am wrong. I would
be break-even after my first Target at 2720. My next targets are 2728 and 2738 (ABC Bullish Price Targets
100%, 127-162% AB setups). After taking 1/2 of position at 2720, I moved my stops to 2711 b/e. Then
I patiently waited for next 2728. Once price started to trade above my
first target: 2720 level, I moved my stop from B/E to 2nd stop level, just below
the Prev. Swing Low (2715). My second target 2727.5 was hit fairly quick for 16.5 points
profit. Now my struggle with Patience started as my price reversed and I was pretty much
ready to close trade on my last lot (3c). But I was pretty determined to wait either my
stop at 2715 or my next target 2738 is hit. From 1pm, next 2.30 hours was testing my
patience. Around 2.30pm, once price traded above my Second target level 2728, I moved
my stop to previous swing low (2718). Now NQ made another swing high and low. Around
3.45p, I realized Market may close without my target hit and I am comfortably
profitable in the trade. So, I placed an order to close at 2730.5 to net 19.5 points.
Sometimes Patience rewards you well, some times false belief coupled with patience
kills you. Today was a good ending :)