Volatilty Zones
May 24, 2012 2:22 PM

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.


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