Can you anticipate market direction?

If there is field relatively unexplored, it is volatility. Because you need to throw away the gaussian curve and look the market in the eyes. Obviously you can what it is doing just now, but do you know where it goes?

Most traders have given up on forecasting, they are merely following the trends. But we are talking human perception and analysis. As many studies have show, human mind decisions can be anticipated with some success and that that should be enough to get an edge.

Let’s start. Here you can see price of gold in € some time ago. Do not worry about multiple lines already displayed. A green arrow indicates there should be some buying opportunity. So?

Let’s go back a little bit and and look at the waves.

Now if you patient engouh, look into Dr Andrew, creator of pitchfork and browse to action-reaction lines. Now the fun begins. Pitchforks and reactions lines by extent capture trend and volatility at the same time. As strange as it seems, volatility can be anticipated. Of course, you know quaterly results date, right? So you expect some move. Acttion-Reaction (AR) lines do anticipate this.

Let’s trace the center line (you need research to be able to find which one is best). Then trace the AR lines.

The space between the lines is volatility in 2-dimensional space: time and price!

According to theory, price should stop on one of the next reactions lines

Fast forward in time!

First line is ignored by market. Then we get  tops on reaction lines. Not just one time but twice!

Wonderful!

Trade safely until next time

Why you need to love volatility

You probably have read in many places that volatility is a monster that will eat your portfolio.

Let’s start from zero: volatility over a year is how much price have in whatever direction.

Now look at this one:

Price have risen from 10€ to 20€ in an  almost straight line. So volatility is roughly 100% and you don’t want to be in? No kidding!

Next time we will see how to observe volatility and how it evolves to a trend.

Trade safely

Volatility trading? Hmmm…

All the content on this website will be original. No lessons about Bollinger bands or how Average True Range is calculated.  This first post will reposition volatility trading with respect to other kinds of trading.

For this purpose, let’s travel east to reach China. They have theories like Yin and Yang but the one that interests us more here is the 5 elements theory. According to it, plants, humans, animals are all driven by a cycle including 5 elements: wood, fire, earth, metal and water. There are 2 cycles actually, one for creation and one for destruction. The market being driven by humans, and robots are programmed by humans so are no exceptions, this cycle to market themselves!

A stock has been issued by a company, this is the wood. Then wood generates fire, price is matter of hot arguments we need lots of computer to finalize. The way prices go and up and down each is volatility, it is earth, it is linked to muscles, so the market is shaping up. Then from the volatility appear trends, which is kind of illusion that prices are going in one direction. Once trend appear, volumes change; volumes are like water of the river, they make the market. When price goes up in a trend, then volumes go down as nobody wants to sell before the trend is over. Volumes in turn change the company; if lots of money flows in, then they have capability to invest and this in turn will change the price of the company. Cycle is over!

From a trading perspective, you can position yourself wherever you want:

  •  At stock level, traders carry out fundamental analysis. Their strategy is usually buy & hold and they want to catch dividends for the money you invest in. They don’t usually care too much about the actual price, saying it doesn’t matter. They come up with funny price  objectives by comparing with other companies in same sector and when the stock plummets, they say they keep it for long term!
  • At price level, traders are usually day traders, order book traders, robots… They draw lines which they call support or resistance. They of course totally disagree with one another, given they are not looking at the same chart with same time frame.
  • At volatility level, there is … almost nobody. Nobody is pure volatility trader. People hate volatility (subject of another future article). Bollinger himself agreed his bands are far from perfect. Keltner also paved some way. This area is still not much explored. The point is you need to ‘see’ things in all this random data that is the market. It gets lots of convoluted mathematics to play here. But the rewards are great
  • At trend trading level, one will meet sour guys. Why? Because they are blamed any time the market plummets, as they openly say they play both upside and downsides of the markets. They may have low success rate but when they win, they win big,  and so an overall positive expectancy
  • At volume level, traders have lots of money to manage. So they can call the company’s CEO and advise on the strategy or the volumes might just die, right?

That’s it. There are times when you need to trade price level (sideways markets), other times when trend is a better choice , or dividend playing at some other time. We need to get an edge to enter the market and to exit.

Until next time, trade safely from the right perspective.

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