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Volatility-BasedT h i l AnalysisTechnicalA l i :Strategies for Trading the InvisbleKirk NorthingtonWith Companion einvisible.commetaswing.com
Kirk NorthingtonBIO The author of VolatilityVolatility-BasedBased Technical Analysis: Strategies for Tradingthe Invisible. Wiley Trading Series, John Wiley & Sons Publishers. ISBN:978-0-470-38754-2. The owner of NorthingtongTrading,g, LLC,, and the creator of MetaSwing,g, aMetaStock and TradeStation Add-On. He trades his own money, and usesMetaSwing technical analysis methods exclusively. Kirk Northington is a technical analyst. He is an associate member of theMarket Technicians Association, through which he is participating in theChartered Market Technician (CMT) Program. Kirk has a B.S. degree from Nicholls State University, in Thibodaux,L i iLouisiana.HHe hhas extensivei experienceiiin controll system engineering,iisoftware engineering, and project management. Kirk, his wife Faith, andhis two sons live in Charlotte, North Carolina. kirk@metaswing.comkirk@metaswing com or (910) 789789-06730673Northington Tradingtradingtheinvisible.commetaswing.comPage 2
The Companion Website:Northington commetaswing.comPage 3
Goal of Volatility-Based Technical AnalysisGoal:Identifyyappoint where,, mathematicallyyspeaking, price should not be, at thatpoint in time;;pi.e.,, find the true inefficiencies.Northington Tradingtradingtheinvisible.commetaswing.comPage 4
Mantra of Volatility-Based Technical AnalysisMantra:Moneyy is made at the ExtremesNorthington Tradingtradingtheinvisible.commetaswing.comPage 5
Money is made at the ExtremesNorthington Tradingtradingtheinvisible.commetaswing.comPage 6
Money is made at the ExtremesNorthington Tradingtradingtheinvisible.commetaswing.comPage 7
How is this possible?Volatilityy Measurement:Identifies ExtremesNorthington Tradingtradingtheinvisible.commetaswing.comPage 8
Can I understand volatility measurement?YesVolatility Measurement with:CalculusNorthington Tradingtradingtheinvisible.commetaswing.comPage 9
VBTA New Concepts and Capabilitis for TAThis Presentation:Will pick one concept and capability andsolve for it:Trend CompensationWe will also view volatility-based support and resistance.Northington Tradingtradingtheinvisible.commetaswing.comPage 10
Money is made at the ExtremesNorthington Tradingtradingtheinvisible.commetaswing.comPage 11
Why is Volatility Measurement Important?Northington Tradingtradingtheinvisible.commetaswing.comPage 12
Why is Volatility Measurement Important?Why? Equityq y OptionspTradingg VaR – Value at Risk modeling Portfolio ManagmentRisk ManagementProgram TradingNorthington Tradingtradingtheinvisible.commetaswing.comPage 13
Why is Volatility Measurement Important?Brain Powerpage 5Quatitative mathematics focuses heavily on volatility measurementNorthington Tradingtradingtheinvisible.commetaswing.comPage 14
Why is Volatility Measurement Important?Horse PowerNorthington Tradingtradingtheinvisible.commetaswing.comPage 15
Why is VolatilityMeasurementImportant?Horse PowerNorthington Tradingtradingtheinvisible.commetaswing.comPage 16
Why is Volatility Measurement Important?Brain Powerpage 5Quatitative mathematics focuses heavily on volatility measurementNorthington Tradingtradingtheinvisible.commetaswing.comPage 17
Why is Volatility Measurement Important?Horse PowerNorthington Tradingtradingtheinvisible.commetaswing.comPage 18
OpportunitiesTake the Offensive Northington TradingRedraw the Playing FieldSimple Volatility MeasurementAvoid Systemic RiskHidden MomentumTrue Overbought and OversoldExit on Cuetradingtheinvisible.commetaswing.comPage 19
Preparing to Use VBTANorthington Tradingtradingtheinvisible.commetaswing.comPage 20
Working with Volatility MeasurementNorthington Tradingtradingtheinvisible.commetaswing.comPage 21
What is Volatility?Concept . . . Not a Specific Measurement “In truth volatility is more of a concept applied to whatever thetask at hand needs it to be. So conceptually volatility as itapplies to a tradable instrument is just a measurement of aninstrument’s price, in terms of rise or fall, within a given timeframe.” Used to project an extreme that might be reached, within areasonable probability Most commonly expressed with Standard DeviationNorthington Tradingtradingtheinvisible.commetaswing.comPage 22
What is Volatility?Historical and Implied “Historical Volatility (also referred to as Statistical Volatility) isa measure of movement within a given period of time.Historical volatility is normally measured using forms ofstandard deviation and is expressed in terms of percent.” “ImpliedImplied Volatility: A measure of possible, or ‘expected’expectedmovement of the underlying stock’s price, as projectedforward through time, expressed as a percentage. It is createdby any of many options pricing models. These pricing modelsutilize all known options trading factors, in addition to theactual current trading price of the option’s premium.”Northington Tradingtradingtheinvisible.commetaswing.comPage 23
Option PricingHistoricalNorthington Page 24
Volatility UnmaskedBasic Forms of Volatility Measurement Standard DeviationAverage True RangePercentageMean (or Average)Linear RegressiongStandard ErrorR SquaredVarianceNorthington Tradingtradingtheinvisible.commetaswing.comPage 25
Volatility Measurement is Simple as 1 - 2 - 3Standard Deviation (20)1. Difference between Close andmoving average2. Square it (Key Step)3. Add the most recent 20 of these,and calculate square rootroot.Stdev(C, 20)Northington Tradingtradingtheinvisible.commetaswing.comPage 26
Average True RangeIt is the greatest of: The distance from today’sy highg to today’sy low. The distance from yesterday’s close to today’s high. The distance from yesterday’s close to today’s low.ATR(C, 14)Northington Tradingtradingtheinvisible.commetaswing.comPage 27
Linear RegressionMost Efficient – Least Squares1. Difference between price andtheoreticalhi l line,lithenh square it.i2. Add up all the squared values3. Redraw the line so that the sumof the squared values is lower.((lather,, rince,, repeat)p )LinearReg(C, 20)Northington Tradingtradingtheinvisible.commetaswing.comPage 28
Predictive QualitiesBasic Forms of Volatility Measurement Standard DeviationAverage True RangePercentageMean (or Average)Linear RegressionStandard ErrorR SquaredV iVarianceForward Predictive Value 2 to 5 Periods Are Fractal and therfore Chart Periodicity independent Dependent on lack of conflicting / overriding fundamental news; as is all TA Amplified by Trend Design specific components for specific purposesNorthington Tradingtradingtheinvisible.commetaswing.comPage 29
Specific PurposeBasic Forms of Volatility Measurement Standard DeviationAverage True RangePercentageMean (or Average)Linear RegressionStandard ErrorR SquaredV iVarianceTTrendd CompensatedCt dO S ld / OverboughtOverSoldO bht DetectionD t tiNorthington Tradingtradingtheinvisible.commetaswing.comPage 30
Northington RSIVNorthington Tradingtradingtheinvisible.commetaswing.comPage 31
Northington RSIVNorthington Tradingtradingtheinvisible.commetaswing.comPage 32
Northington RSIV{ py g{CopyrightKirk Northington,g, NorthingtongTrading,g, LLC.All rights reserved}{User Inputs}pds1: Input("Lookback", 2, 1000, 30);pds2: Input("Linear Regression Periods", 2, 1000, 40);pds3: Input("ATR Periods", 2, 1000, 7);Upper: Input("Upper("Threshold",hh ld" 5050, 9999, 70)70);Lower: Input("Lower Threshold", 1, 59, 30);{Express the prevailing trend}x1: (C - LinearReg(C, pds2));Trend Compensation{Calculate the RSIV indicator}x2: If(x1 Ref(x1, -1), 1, 0);x3: If(x1 Ref(x1, -1), x1 - Ref(x1, -1), 0);x4: If(x1 Ref(x1, -1), 1, 0);x5: If(x1 Ref(x1, -1), Ref(x1, -1) - x1, 0);x6: Sum(x3, pds1) * Sum(x2, pds1);x7: (Sum(x5, pds1) * Sum(x4, pds1)) .00001;x8: 100-(100/(1 (x6/x7)));{Volatility threshold calculation}x9: (ATR(pds3) / Mov(C, pds3, E)) * 100;x10: x9 - LinRegSlope(x9, pds2);{Plot the indicator}Upper x10;Upper;x8;{Fml("Northington RSIV Fast");}Lower;Lower - x10;Northington Tradingtradingtheinvisible.commetaswing.comPage 33
ExampleNorthington Tradingtradingtheinvisible.commetaswing.comPage 34
Required CapabilitiesCapabilities of a VBTATrading System Oversold and OverboughtTrend DetectionBroad Market IntegrationSSupportt andd ResistanceR i tHistorical VolatilityImplied VolatilityMulti-Timeframe VerificationNorthington Tradingtradingtheinvisible.commetaswing.comPage 35
The FrameworkCapabilitiesComponents TTI ATR ExtremeTTI Fabric SDTTI Fabric Ratio LR-SDTTI RSIV-1ApplicationTTI StochExTTI Fabric LGTTI Trend StrengthTTI Composite1 Oversold / OverBoughtTrendingxxxxNon-TrendingxxxxxxTTI Trend EntryxxCapabilities of aVBTA Trading System Oversold and OverboughtTrend DetectionBroad Market IntegrationSupport and ResistanceHistorical VolatilityImplied VolatilityMulti-Timeframe Verification2 Trend DetectionTrendingNon-TrendingTTI Trend Entryxxxxx3 Broad Market IntegrationT diTrendingNon-TrendingTTI Trend Entry4 Support and ResistanceTrendingNon-TrendingTTI Trend Entry5 Historical VolatilityTrendingNon-TrendingTTI Trend Entryxxxxxxxxxxxxxxxxxxxxxxxxx6 Implied VolatilityTrendingNon-TrendingTTI Trend Entry7 Multi Time Frame VerificationTrendingNon-TrendingTTI Trend EntryNorthington Tradingxxtradingtheinvisible.commetaswing.comPage 36
Volatility-BasedTrading Bands (N Bands)N Bands are calculation ofprice volatilityvolatility.They represent an extremelevel of support and resistanceon a chart.h tWhen price approaches the NBands a reversal,reversal or at least apause is likely.Higher significance whenvolatilityl tilit iis hihigher.hNorthington Tradingtradingtheinvisible.commetaswing.comPage 37
Volatility-BasedSupport and Resistance (S/R) LinesNorthington Tradingtradingtheinvisible.commetaswing.comPage 38
Volatility-BasedSupport and Resistance (S/R) LinesNorthington Tradingtradingtheinvisible.commetaswing.comPage 39
Other ExamplesNorthington Tradingtradingtheinvisible.commetaswing.comPage 40
Other ExamplesNorthington Tradingtradingtheinvisible.commetaswing.comPage 41
Other ExamplesNorthington Tradingtradingtheinvisible.commetaswing.comPage 42
Other ExamplesNorthington Tradingtradingtheinvisible.commetaswing.comPage 43
Other ExamplesNorthington Tradingtradingtheinvisible.commetaswing.comPage 44
Other ExamplesNorthington Tradingtradingtheinvisible.commetaswing.comPage 45
Live ChartsLive Charts of Your ChoiceNorthington Tradingtradingtheinvisible.commetaswing.comPage 46
Volatility-Based Technical AnalysisKirk Northington www.tradingtheinvisible.com www.metaswing.com kirk@metaswing.com or (910) 789-0673Northington Tradingtradingtheinvisible.commetaswing.comPage 47
Volatility-BasedT h i l AnalysisTechnicalA l i :Strategies for Trading the InvisbleKirk NorthingtonWith Companion einvisible.commetaswing.com
Kirk Northington The author of Volatility-Based Technical Analysis: Strategies for Trading BIO The author of Based Technical Analysis: Strategies for Trading the Invisible. Wiley Trading Series, John Wiley & Sons Publishers. ISBN: 978-0-470-38754-2. The owner of Northinggg,, g,ton Trading, LLC, and the creator of MetaSwin g, a
