A Stylish Study of Price

[Voltrader 10]

When I first started trading, I used to beat myself up when my equity curve was either losing money or not growing consistently like I wanted it to. Consequently, I would constantly search for better entries, better systems etc. It finally dawned on me that there was a strong correlation to my equity curve and ES (S&P mini futures) volatility. My pnl would increase rapidly during periods of high volatility and would remain stagnant in periods of sideways or up-grinding markets.

 

Contrary to pundits and pushy trading educators, traditional (albeit boring) academic finance can be a value-added tool in the retail trader’s arsenal. Stephen J Taylor introduced the notion of Stylized Facts, which provide great insight into our basis for understanding volatility and the best scenarios for intraday trading. In Asset Price Dynamics, Volatility, and Prediction Taylor lists some Stylized Facts for intraday returns:

• Intraday returns have a fat-tailed distribution, whose kurtosis increases at the frequency of price observations increases.
  

• Intraday returns from traded assets are almost uncorrelated, with any important dependence usually restricted to a negative correlation between consecutive returns.
  

• There is a substantial positive dependence among intraday absolute returns, which occurs at many low lags and also among returns separated by an integer number of days.
  

• The average level of volatility depends on the time of day, with a significant intraday variation.
  

• There are short bursts of high volatility in intraday prices that follow major macroeconomic announcements.
  

 

What can we learn professor Taylor’s study? One, its really important to break intraday trading in futures or equities into timeframes. Traders make money by being on the correct side of substantial price fluctuations; however, if one is trading during a period of low volatility the likelihood of profitable scalp trading is very low. Two, bursts of volatility following major macroeconomic events can offer savvy traders great opportunities to take advantage of technical chart patterns. Thirdly, we also know that volatility comes in bunches. Meaning that there is a strong likelihood that periods of larger price movement tend to cluster together.

 

Lastly, traders can use this to extrapolate the best times of day for a particular style of trading. For example, during the first hour (initial balance) traders might use a scalping strategy as a opposed to a trend following strategy, while in the afternoon a trader might be better served to hop on the established trend for the day.

 

In conclusion, if retail traders can align strategies with probable periods of high and low volatility they will see their overall equity curve increase exponentially.

 

Green Trading,

Voltrader

[Voltrader 10]

As much as I get annoyed with academics, I really think that what Taylor discussed can be used to make money. For example, I allocated some of my capital to a strategy that just trades the afternoons and looks to ride trends if they exist. I sometimes like to scour the literature for ways to improve my trading.

[SIUYA 11]

gee Mitsubishi give the guy a chance - he has come one with what seems like something that is actually based in some factual breakdown of the markets.

In summary maybe it shows using facts/analysis - not subjective reasoning - you should have patience and be selective in the markets and that you dont have to trade all the time - wait for the right opportunities.

If the books on Amazon are anything to go by it seems a little more scientific. Now it may be academic and academics dont usually do that well in the markets however the point of academia is usually to expand knowledge and ideas not make money.

 

It seems to me that if if the first criticism you have is that "tell me something I dont already know" then you think you are the expert on everything.

 

(voltrader - before you get flamed - beware that if you are selling anything thats fine but you should register as such, I say as I noticed Green Trading in your sign off...whats that.)

 

Otherwise as I like to read about new things as well as stir up Mitsuibishi sometimes this thread might be interesting, or it might have all been said and done before.

[Voltrader 10]

"Green Trading"

is just a signature i use that means profitable trading. As far as the rude response, it just proved to me that I shouldn't get involved in forum discussions.This was my first to the community and probably will be my last. I was trying to offer a different perspective on day trading seeing as how most retail traders blow out over and over. It seemed to me that the reason most people struggled was the fact that they viewed trading in a non-scientific manner. I'm not saying you need to be a quant because i'm not, but to have such a foul attitude about very relevant information speaks volumes.

 

It perplexes me how somehow can expect to succeed in a chaotic complex market without looking for repeatable "stylistic properties". The reason that option traders trade the volatility surface is because it mean reverts. Mean Reversion is a predictable pattern. Gambling day in day out and shunning academic info is willful ignorance at best.

 

All I was trying to do was contribute to the community, if its not well received then so be it.

[karoshiman 10]

 

...

 

... as I noticed Green Trading in your sign off...whats that.

 

...

 

 

 

I've interpreted it as "Profitable Trading to you guys!"

 

 

(An alternative would be "Trade agricultural futures!"... but that did not make sense to me )

 

 

EDIT: Did not see Voltrader's reply yet. It was published with a time lag as his posts are still moderated.

Edited May 17, 2012 by karoshiman

[SIUYA 11]

Voltrader - please do get involved. there are plenty here and elsewhere that do carry on like internet fascists, but its all part of the game, there are also plenty of interested participants who may also not agree with you, but that should help clarify even your own thoughts/ideas. - as in trading you have to have thick skin. dont forget - the majority who trade in the market are often wrong, and things can be misinterpreted....

 

Given your mention of options you may have a lot more to offer than others.

 

The green trading mention now seems so obvious. :doh: karoshiman is smarter than me.

Edited May 17, 2012 by SIUYA

[Brookwood 10]

I for one would welcome a discussion about returns in relation to volatility, and anyone who has attempted to quantify this would have my ear. I feel that my positive equity curve ( not "making winning trades", mind you,) has also been related to "Goldilocks" volatility- not too little, not to much,but juuuust right, which is a weak link in my trading. If someone has explored this issue and wanted to share, it would be a valuable contribution to the community.

Cheers,

Brookwood

[Tradewinds 12]

its really important to break intraday trading in futures or equities into timeframes.

 

Yes. Definitely. I agree.

[pat15 10]

Hope Volttrader comes back and posts his thots. Unfortunately, there are many whose sole purpose is to criticize others rathen than ask Q and learn.. What a pity.

[Tradewinds 12]

As far as the rude response, it just proved to me that I shouldn't get involved in forum discussions.This was my first to the community and probably will be my last.

 

Think of a discipline like martial arts where there are defined levels of progress. Depending upon your achievement and progress you get a colored belt and different degrees. You decided to share, so you achieved a level higher than most. Now you are saying that you are going to quit, which is okay, depending upon the reason. If you want to continue except for the negative feedback, is that a good reason? Very few people will get to 'level 1' and share anything. Even fewer will get to 'Level 2', and keep going against the difficulties. What level do you want to operate in or achieve?

 

Unfortunately the natural human mind doesn't seem to honor overcoming criticism from others. We can become passive and allow others to control our destiny. That's not a good thing. I'm not saying that is what you are doing, but if it is, I hope you consider whether that's the way you want to live your life or not.

 

It can be a good and valid tactic to just quit and move on, depending upon each person's needs and abilities. But at least consider what level you want to operate in and achieve. There are few leaders and many followers. Leader's don't have to be 'Type A', hard driving personalities. The world might be a better place if we had fewer of those people at the top of the power structure.

 

I'm not saying it's bad to quit and move on, I'm just saying that we often get easily discouraged and quit, without considering a couple of things. All I'm saying is to consider what level you want or are able to operate on; how unfortunate it would be if you are meant to be a leader, and quit; and who do you want controlling you life and your future?

[karoshiman 10]

Think of a discipline like martial arts where there are defined levels of progress. Depending upon your achievement and progress you get a colored belt and different degrees. You decided to share, so you achieved a level higher than most. Now you are saying that you are going to quit, which is okay, depending upon the reason. If you want to continue except for the negative feedback, is that a good reason? Very few people will get to 'level 1' and share anything. Even fewer will get to 'Level 2', and keep going against the difficulties. What level do you want to operate in or achieve?

 

Unfortunately the natural human mind doesn't seem to honor overcoming criticism from others. We can become passive and allow others to control our destiny. That's not a good thing. I'm not saying that is what you are doing, but if it is, I hope you consider whether that's the way you want to live your life or not.

 

It can be a good and valid tactic to just quit and move on, depending upon each person's needs and abilities. But at least consider what level you want to operate in and achieve. There are few leaders and many followers. Leader's don't have to be 'Type A', hard driving personalities. The world might be a better place if we had fewer of those people at the top of the power structure.

 

I'm not saying it's bad to quit and move on, I'm just saying that we often get easily discouraged and quit, without considering a couple of things. All I'm saying is to consider what level you want or are able to operate on; how unfortunate it would be if you are meant to be a leader, and quit; and who do you want controlling you life and your future?

 

 

Man... these are some deep thoughts and deductions as a response to his tiny comment...

[SunTrader 10]

.........

In conclusion, if retail traders can align strategies with probable periods of high and low volatility they will see their overall equity curve increase exponentially.....

How does one do that? It is easy enough to say high volatility follows low volatility follows high volatility round and round.

 

But timing is everything.

[fxtrader12 10]

"Green Trading"

is just a signature i use that means profitable trading. As far as the rude response, it just proved to me that I shouldn't get involved in forum discussions.This was my first to the community and probably will be my last. I was trying to offer a different perspective on day trading seeing as how most retail traders blow out over and over. It seemed to me that the reason most people struggled was the fact that they viewed trading in a non-scientific manner. I'm not saying you need to be a quant because i'm not, but to have such a foul attitude about very relevant information speaks volumes.

 

It perplexes me how somehow can expect to succeed in a chaotic complex market without looking for repeatable "stylistic properties". The reason that option traders trade the volatility surface is because it mean reverts. Mean Reversion is a predictable pattern. Gambling day in day out and shunning academic info is willful ignorance at best.

 

All I was trying to do was contribute to the community, if its not well received then so be it.

 

On fx forums one can get criticized for giving good ideas on trading, and many entries are talking pure BS. Maybe you shouldn't get discouraged by that, accept that as normal and join the party. Suggest, don't reply to attacker, he has no right to do attacking, neither the right to tell you what you should present as fx material, he is just a naughty punk and not worth to reply to. So, if someone reject you for innocent and good entries, simply don't reply

[bobcollett 10]

Come on Voltrader,

Lets hear some more about mean reversion and Professor Talor

Thanks

bobc

PS The Manhatten project had about 2000 "experts" to develop the atomic bomb.

I guess thats why mitsubishi hates "experts". He's Japanese.

[trader001 10]

Trading, in its nutshell, is about dealing with volatility. If there is no volatility, there isn't much trading opportunities around. With that said, the question is always to find the right moment and right price to enter a market where you can clearly define the risk associated with the trading action. Of course, scientific method is useful to identity such opportunities in a systematic matter, but the question is always there. How can we consistently generate alpha based on your method. Based on your description on Dr. Taylor, I get a sense several techniques can be deployed to analyze the hypothesis. Time series models and simply covariance analysis can all be used to do that. So what did you use, Voltrader?

[pat15 10]

Great post Tradewinds ... Something to think about.... Thanks.

[SIUYA 11]

There's nothing in my comment that was an attack on the OP.Wonder what the response would have been had i done so?

 

( All the above)

 

 

This is the beautiful thing about interpretations. :doh: and the rule of unintended consequences.

Unfortunately M, thats how a lot of things on the net are taken, especially when as a first post to a thread starter. I think every one has been guilty of it at some stage, and I also agree with your assessment about experts...its just that as a community, discussions need to be encouraged and then dissected, for good or bad....otherwise the community dies.

It seems that we are three pages into it and no more vol trader. I have not read the books /studies he mentions, and it seems no one else reading here has either and so it may have died before any value was uncovered or debunked.

[Patuca 13]

stylish..i don't know.But no substance beyond what we already know.You admit that yourself.Maybe this prof could team up with Rande -then we can all play spot the difference.Jeez i hate experts. Nothing

mitsubishi must hate himself :rofl::rofl::haha::haha::

[wrbtrader 10]

...I really think that what Taylor discussed can be used to make money...

 

Taylor is absolutely correct and I've been using volatility analysis is the futures markets since the later 80's with success. It's important to understand the price action one is trading involving how volatility changes (volatility analysis) throughout the trading day to be able to exploit it with different trade approaches.

[bobcollett 10]

Taylor is absolutely correct and I've been using volatility analysis is the futures markets since the later 80's with success. It's important to understand the price action one is trading involving how volatility changes (volatility analysis) throughout the trading day to be able to exploit it with different trade approaches.

 

Hi wrbtrader,

Seeing that voltrader has gone back to Belize (thats where Patuca stays),what about you telling us how volality analysis works.

Kind regards

bobc

[Patuca 13]

Patuca- Do i really need to batter you over the head with your own canoe paddle?

You miserable little attention junkie.You really are a proactive waste of space.

LOL that is a great post mitsubishi. I can't help but like you! Good sense of humor.:applaud:

[Patuca 13]

Patuca you old fox.You still posting? That cannot be right,you're dead.I distinctly remember running you over on your bike with an articulated lorry,leaving tyre tread patterns embedded in your face....Oh dear.i must have forgot to tell you.I am opening a new restaurant "Road Kill Bar And Grill" It tastes better than it sounds,but in your case we're just feeding your bones to the dogs. I just can't risk health and safety closing us down in the first week.

don't you think that is a little overkill? thats it. i am not giving out anymore of my trading secrets such as go long when my motorcycle shifts from 1st to second gear and get out of your position when i hit the final gear. Or go short when I begin gearing down and cover when i am in first gear. you on your own mitsubishi you little snail..go back to polishing your emini cooper.

[bobcollett 10]

don't you think that is a little overkill? thats it. i am not giving out anymore of my trading secrets such as go long when my motorcycle shifts from 1st to second gear and get out of your position when i hit the final gear. Or go short when I begin gearing down and cover when i am in first gear. you on your own mitsubishi you little snail..go back to polishing your emini cooper.

 

Well, after a tough day at the coal face, I can relax with mitsubishi/patuca correspondence.And it looks like they are getting quite friendly

bobc

[Patuca 13]

now now now mitsubishi for someone who understood george douglass taylor on first read and hates experts i am quite surprised at your latest trading tactic. but there may be some justification for such a tactic. i am trying to help you here mitsubishi. perhaps the pic will give a possible explanation for using such a tactic.

 

btw what happened to our friend mr felton? i dared him with the mitsubishi black box trading challenge and he is not answering back??

 

captain bob good to see you again. whats it like over there?

 

well it may be getting time to ride off in the sunset...or visit some other country. the high and mighty USA is getting boring. been here a few months. too many egotistical people here...

 

i may have to write a book on "Humility and How I Obtained It"

Edited June 5, 2012 by Patuca