On Volatility

Volatility is one of the least understood factors future traders need to deal with. This is one of the most important keys in the market that helps the trader from being caught thinking linearly.

All traders are interested in price changes, because if price doesn’t change, no opportunities are provided.

One of my favoured statements is that “a forecast makes the market (provide the liquidity) and strategies make the profit.” Well the same applies to Price; it has to change in order to have a market, to have liquidity. For us technicians, price is the best advertisement on the markets.

Price change is directly proportional to volatility, and volatility is the first derivative of price. The relationship between price change and time is that change in price is relative to the square root of value. Volatility is an underlying universal quality of the market that is frequently passed over by many traders.

In the 1990’s traders used fixed-value stops for both entry and exits. Like pivot points or fixed dollar amounts.

But as volatility became more widely understood, thanks to technicians, groups like the Market Technicians Associations and analyst like John Bollinger, clear definitions of volatility emerged.

Fixed-value stops became worthless, but today you would not know it through the general list of garbage promoted as educational. Prove it to yourself, just Google “money management” and see what you get.

One of the basic concepts is from Wells Wilder’s Volatility System and the use of True-Range to measure the volatility more accurately.

True-Range is very similar to the High/Low Range, but takes into consideration any difference between the previous close and the following day’s price opening if it’s a gap.

With markets running 23 and ½ hours a day, the opening gaps are not as important, unless you are building a day trading systems that does not consider the Globex data.