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Determining range expansion for the ES (S&P eminis)
From you experience, have you found this to be a reliable way to predict range shift?
Recently, the range is at an extreme of the band and volume has reduced and MOM has fallen.
(BTW I understand MOM as rate of change in price and not volatility- but volatility has fallen as well so you criteria are met.)
Can you help answer these questions from other members on NexusFi?
Re 1. From your experience do relative volume or market breadth indicators, from the prior days session or perhaps the rate of change of these measures from the last 3-4 prior days, indicate if the following day is a range shift day (e.g moving form a NR 10pt series of days to 18, 20 or more point day?)
re2. is the prob also increased with an outside day?
re3. Holy grails is all I'm interested in!! LOL. As a friend said was I was moaning about working 14 hour days:
"You are a very focused person. You can do it. If it was easy everyone would be doing it."
-- If you think something is impossible, don't disturb the person doing it." - source unknown.
This 2 year quest of mine is very much a quest for the holy grail. (As you know the quest for the holy grail is thought to refer to spiritual transformation and not the search for a physical object.) I am very much using day trading as a vehicle in my spiritual growth process.
I do not think that there is a direct relationship between the prior day and today. Sometimes after a narrow range day, you will get another narrow range day, sometimes you will get range expansion. As an example, let us have a look at EURUSD today, as the projected range was exceeded.
EURUSD / 6E
Yesterday was a NR7 day for the Euro, and today became an outside day, as EURUSD broke out upwards during the Asian session, reversed during the European session and then declined below yesterday's low. Today's high was made near the balance line, so the overall picture is bearish.
How could this price action be predicted? There was the EU summit today, and the Euro was certainly on the agenda. So you would expect increasing volatility, as currencies react to political decisions. The rise of the Euro during the night session reflects the expectations of the market, the drop of the Euro reflects the meagre outcome of the European summit, as expectations were not met.
Relative Volume: The Asian Session Volume - prior to the London open at 7:00 AM GMT - was at 111% of the average value for the last 20 Fridays (chart 2). Most of this volume could be observed between 6:00 AM and 7:00 AM in the morning as the traders went to work early and EURUSD peaked. The idea is to observe volume prior to the open and verify, whether this
- increases the odds for a range expansion
- or increases the odds for a reversal, if the range expansion has already taken place
When the European session opened, the range target - based on the average daily range of the last 3 and 10 days had not been met, so a continuation move was possible (chart 3).
After price reversed below the target, it continued to move down until the lower range was reached. From there prices did not rebound, but other timeframe traders saw the opportunity to drive prices further down, as the failed breakout to the upside had trapped a number of bulls (chart 4).
I have no charts on range expansion.
I have not started this project.
For myself, if I knew which days were NR days I could work on my backlog of work rather than be on-the-screen.
I only wish to trade days MR and WR days.
Aquarian, have you ever considered to explore the opposite side of your quest, ie, instead of trying to predict you act as if you were a sniper and wait for your target to show up. Range expansion can only take place at the outer limits of a given range so why not try to spot these areas and wait for some positive signs of range expansion. Soon in my own quest i received quite of few wise advices and one of them was, don't try to predictanything and ask the right questions. In this respect, a good question would be, where is range expansion more likely to occur and what signs should i look for in order to spot early an emerging range expansion ?
However, i personally think the path of prediction is the wrong path to take for the small speculator as your chance to find the crystal ball is pretty small. If you can't really expect to predict anything with enough accuracy to be profitable then why would you want to take this difficult street issue particularly if there exist easier roads to reach your destination which is to make money $$$ ?
It's not so much about "predicting" outcomes as it is about the "probability" of outcomes. It's an empirical method that frames your processing of information and also gives you a point of reference. In absence of empirical data you are left with making a subjective decision. With enough experience and practice you may be able to make consistently logical decisions with this approach, but the former method allows for more consistently favorable outcomes.
A huge problem with this that needs to be addressed is the entire concept of narrow range/ range expansion is a moving target itself.
A narrow range 2 years ago would be a wide range today. That wouldn't be so hard though I guess if you just judge the time frame of your data vs the VIX in a rough manner.
For something finer tuned, I don't see how you could get around looking at changes in implied volatility of SPX options.
If anyone has a crystal ball for this type of stuff it is being priced in there.
I do think you have to consider though there is a different between impossible and not worth doing. While I don't think this idea is impossible I don't think it is worth bothering with.
You can't make a model spitting out 1 or 0 for range expansion/no range expansion tomorrow without defining quantitatively what you mean by range expansion. Can't use a probability between 0 and 1 either without that definition.
The nice thing about the volatility regimes we appear to have is they don't change that much from day to day. Doing this would make sense if one day we would have a 20 point YM range and tomorrow 500 points..
Most of the concepts such as the average daily range or floor pivots are indeed based on historical volatility, which is a limited concept. This was particularly obvious during the first days of January after the X-mas holidays. Historical volatility, if based on the prior 10 days was extremely low. Any trading approach based on this low volatility was deemed to fail.
So what is needed, is implied volatility. This cannot be obtained from historical data of futures, but as you said options data is required. Integrating this with an indicator should not be that difficult. Either you need to subscribe to some VIX data allowing the indicator to catch it, or put that data manually in.
I personally would like to have a measure of both historical and implied volatility on my chart. Talking about daily values only.
