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Silver Dragon and i wanted to discuss this topic and we both trade futures, so i have added this topic here because i have used the emini's as an example in our discussion. i also use the same analysis for currencies, metals, crude and natural gas.
this is what Silver Dragon said and i was interested in his thoughts on the subject.
I daytraded stocks for 10 years and switched over to futures 13 years ago.
I am a trend trader and analyze volatility, expected move and trends every Friday after the close. My analysis tends to end up with percentages, averages, probabilities and ranges.
Most traders have different definitions for volatility, expected move and trends, so I will try to define them as I go.
Volatility is the distance that price moves over some time period. For emini futures I tend to trade the first 2 hours after the equities open. So my volatility number is the price move over those 2 hours. The price move over those 2 hours has 2 components, trends and chop. I focus on the trends. My definition of a trend is a price move in one direction from the trend start to when price retraces against the trend more than my initial stoploss. I analyze those trends and calculate the average percent of trends that move more than 2 times my stoploss. Based on Friday’s analysis, during that time period, for the emini, 38% of them moved more than 2 times my stoploss. For those 38% of trends, i calculated an average move of 3.1 to 4.2 times my stoploss.
During the trading day when I add support/resistance and market context, I can raise that ratio from 38% to over 50% for the actual trades that I take and achieve more than a 2:1 profit/loss ratio. The 38%/50% and the average move is used to setup my charts for trading. They are also used for trade management, determining the initial stoploss and contract sizing.
Silver Dragon, How do you define volatility, expected move and reversion to the mean and how do you analyze and use them in your trading.
Let me start by saying you are head and shoulders of where I am at. Salud!
I am very visual trader. I keep and eye on various chart intervals and keep and eye on standard deviation and wait for price to reach 1 to 2 std deviations. Then I buy or sell accordingly. The idea being that price hit its expected move and will revert back to its mean. My favorite chart setup is the 1 hour chart at a 3 week time frame.
Once I place the trade I wait for price to revert back to the channel and sell where congestion is or some other support/resistance level occurs. Sometimes I wait for price to move back to the opposite std dev channel line. Below is a trade I took last week. The target was hit within a few hours of placing the trade.
I use volatility to determine if my expectations of the price movement are in in line with what I see on the chart.
What I like about playing the std dev channels is that if I am wrong I am more willing to hold because more than likely it will revert back to my entry on the second or third std dev channel.
I would be interested to see your Friday analysis for any given product.
Here is a trade I entered tonight. Price made it to the first upper std deviation line. Price has been declining over the last few days. This is a high probability trade. Taking the short position. Defined entry and exit.
thanks for the info and the chart. for the chart... are those green/blue lines longer term standard deviation lines? i assume red is zero deviation line. not sure what you mean by using volatility to determine if expectations are in line with your chart. thanks
today is FOMC day and someone must have leaked information because starting at the equities open all my currency charts moved down at the same time(i always look at currencies for moves at the this time) ... i trade futures us dollar vs euro, pound, yen, swiss franc, australian dollar, new zealand dollar, canadian dollar and peso .... this doesn't happen very often, but when it does, it can make for a great day trading. i was able to short yen swiss franc, pound and australian dollar. attached is my chart for australian dollar. its messy, but everything on the chart is used for my daytrading analysis of market context and setup identification. after i noticed all currencies dropping, i shorted as many currencies as i could. for the australian dollar trade, when price started moving back down, i shorted thinking that if it ran below the red line low of yesterday, it would run for a while (ie no congestion).
if you look at the right side of the chart you can see the results of my weekly analysis and real time info for today. the green numbers say that there is an average of 5.1 trends from 5am to 8am pst, and 2.2 of those trends average greater than 2 stoploss. the black numbers below that say that for those 2.2 trends greater than 2 stoploss, they average 2.8 - 3.9 stoploss. they are averages and the trend that i traded today ran 4.5 times my stoploss versus the average range of 2.8-3.9. the cyan numbers below that indicate average volatility for each time period in stoploss terms. for example, i trade currencies from 5am to 8am and the average move is 3.5 times my stoploss, the number right after that is a running number of the volatility happening in real time today so it measures the high-low from 5am to 8am. the other cyan numbers are for 12am-5am and 8am to 11am.
interesting topic, does any of you look at option prices to have a feel for the expected move of the futures? I am not an expert on options but I know that options traders use this concept of expected moves all the time. I have always planned to look into it more deeply.
RTY trade today... Price had been below the low of yesterday for most of this session and then a new trend up started with the long setup signal about 9:40 on my chart. you can see my analysis on the right hand side of the chart.
Yes, if I am trading for longer term trades I get the expected move and volatility from the closest option to expiration. It confirms if my expectations of where I think it will move and the target are realistic.
If the volatility is high then I have to take into consideration volatility contraction. So if the expected move is 20 dollars 3 weeks out with a volatility ranking of 50, I may want to set my target to be half of expected move in the event volatility contracts and the daily moves and overall expected move become smaller.
You were looking forward to this Friday’s analysis. Here is a description of that analysis. I perform this analysis on futures contracts for currencies, crude, natural gas, metals and indexes.
My definition of a trend is a price move in one direction from the trend start to when price retraces against the trend more than my initial stoploss.
The first step in my analysis is to evaluate what the best initial stoploss is for the next trading week. if the stoploss is too small then the trends tend to be very short and the risk of stopping out is high. If the stoploss is too large then the trends tend to be much longer, but the risk of holding through retraces is very high. However, there is a sweet spot for an initial stoploss somewhere in between these two extremes.
I start with the current initial stoploss and adjust it up/down to find the best fit for the number of trends larger than 2 times my stoploss. this is the first line of data shown on the upper right hand side of all my charts. Ideally, I am looking for fewer trends that move more than 2*stoploss and a ratio of (trends>=2*stoploss) / (total trends) that is > 40%. You can see this on the RTY chart in my post above where the total trend average is 13.2, the average (trends>2*stoploss) is 5.8 with a ratio of 44%. That means if I traded every trend at the start and got out of every trend at the end, I would be profitable 44% of the time. This analysis determines the initial stoploss that I will use for the next week.
Once I have the best fit for trends and initial stoploss, I then look at trade risk sizing. Some people can live with a $100 stoploss and others may be happy with a $1,000 stoploss. My current risk per trade is $300-$500. On the RTY chart, below the green trend analysis numbers, you can see next line of black numbers that represent the trend length range for (trends>= 2*stoploss). for this week, that range is 3.1-4.2 times my initial stoploss. So I know that I have a 44% chance of getting into a good trade with a profit/loss ratio of 3.1-4.2. that is if i got in at the start of the trend and got out and the end of the trend.
When trading in real time, I add market context and support/resistance to improve the win rate from 44% to above 50%. I usually get in after the trend starts and get out before the trend ends, so my profit/loss ratio is probably greater than 2:1 and not the 3.1-4.2 if I had entered when the trend started and exited when the trade ended.
My trend analysis above produces a stoploss for 1 contract. then I adjust the number of contracts so my initial risk is somewhere in my risk range. This usually ends up being 1-10 contracts. If the risk of 1 contract is over $500 then I will not trade that future. If it is less than $300, I will add contracts so that I end up in the $300-500 range.
