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Volatility is mean reverting so when you get a period
of high volatility you can expect the volatility to
drop at "some point" in time.
Right now the S&P has a Historical Volatility reading
of 21 which is about the average volatility for the
life of the S&P.
Maybe adjusting your stops using the volatility will
help (for the time being). Here is an excerpt from an
article off of Tradehard.com
Know Thy Volatility: Using HV to Set Stops
To help ensure (but not guarantee, of course) that you
do not get stopped out when position trading, HV can
be used to determine where practically they should be
placed. Connors has shown that by taking the HV and
factoring in the number of days you intend on holding
a position, a realistic placement of stops can be
achieved. Let’s apply this method of stop placement to
a volatile stock.
Suppose you wanted to trade Metricom (MCOM), a stock
with an extremely high historical volatility rating of
145% on 7/21/99. Also, suppose you intend to hold the
position for at least five days. If we reduce the
volatility down to the holding period (five days), it
suggests that the stock has the potential(a two-thirds
chance) to trade as high as 42 5/8 and as low as 28
3/8. Therefore, in order to reduce the likelihood of
getting stopped out, you would have to set your stops
outside of 28 3/8 for longs (a) and 42 5/8 (b) for
shorts.
I trade the S&P's using the VIX index to help
determine which direction I will trade, another
instrument I use is the TRIN which tends to forecast a
move, but it comes in handy when I apply it to my
standard system.
I hope this helps.
JS
--- Gary Fritz <fritz@xxxxxxxx> wrote:
> I'm not an accomplished analyst. I'm a system
> trader. And my
> systems have been getting whacked for the past
> month, mostly due to
> volatility.
>
> It seems to me that the volatility has really
> increased lately. In
> the S&P there have been 6 15-25 pt swings, in less
> than an hour, in
> the last 6 days. None of them follow through with
> any kind of move.
> 10-20pt gap opens have become common. The ND is
> even worse.
>
> This raises hell with a short-term system that holds
> overnight and
> capitalizes on more sane moves. The market settles
> down for a day or
> so, lulling my system into complacency so it takes a
> position, then
> wham! There goes a 20-pt explosion, and I'm hit for
> another loss.
>
> Can someone comment on this? Do you expect this
> level of volatility
> to continue (or increase!?) for the near/forseeable
> future, or is
> this a short-term aberration? My system has never
> seen anything like
> this in its 3+yr history, encompassing several
> hundred trades.
>
> I can adjust my system to behave better in the
> market as it's acted
> for the last several months, but I'm nervous about
> changing something
> that has worked well for a long time. But if this
> market is going to
> keep acting like this, I need to change something or
> I'm going to be
> in deep trouble.
>
> For sure I'm going to have to start taking smaller
> positions, so at
> least I can go broke more slowly.... :-(
>
> Gary
>
>
=====
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