Thursday, November 05, 2009

Hunting for Volatility Squeezes

While I consider myself a serious student of the market, I don’t call myself a trader. But I do trade and have done so with reasonable success. This year, I incorporated a new dimension into my trading: volatility. Simply put, I’m buying when volatility is low, and I’m selling when volatility is high—and I’m doing so on charts that appear to be good candidates for long entries. I’ve not used it for short positions.

The point of this post is not to go into an in-depth analysis regarding volatility, but rather to introduce to you this concept and provide some actual examples. I think that you will have fun experimenting with it. I'll mention, too, that John Carter uses this in Mastering the Trade . But I cobbled it together for myself (after first experimenting with Donchian Channels) before reading his book. I believe it to be a book that belongs on most traders bookshelves.

Method: There are two technical indicators deployed: The Keltner Channel and Bollinger Bands. Like most indicators, both of these are measurements that are incorporating time and range of price movement that the user defines. For this method, I am specifically hunting for stocks that have the Bollinger Band nested INSIDE the Keltner Channel. Carter notes this as quiet periods..."period of reduced volatility and signals that the market is taking a significant breather, building up steam for its next move." For the Bollinger Bands, he uses 20 and 2, and for the Keltner Channels, 20 and 1.5. I started out using 10, as a parameter for both, and I've not changed it. But I wanted to share the parameters a vocational (Carter) rather than an avocational (me) trader utilized.

Now for four charts. I want to give a brief preamble. While many of you are technical traders, I mix macro fundamentals and sector fundamentals into my work. It's my quirk, and it works for me because of my learning style and my background. It points me in the direction I want to look and helps me assess risk.

The first three stocks were actual positions. I've been trading Chinese stocks long before it was fashionable to do so. The floats and price range may not suit many here, but the concept can be applied to any stock. It's worth noting that because this market fell hard, there were lots of attractive candidates in these long bases. The last is a contemporary example.

Here's SNEN. I liked them because they were in the compressed natural gas space in China (engine conversion units and stations). I also knew that they had a small balance sheet problem--so I took my money and ran. This stock is an example where I entered, sold on the volatility spike. Re-entered and re-sold on the volatility spike. No third time charm on this one because of the risk on the balance sheet. They are being bought by a shareholder.

Second is AZC. This stock is again a combination of fundamental (copper--they will supply 10% of the copper when one of their Rosemont site comes on board) and TA.

HPJ is another one. This one broke out along with the other lithium-ion battery producers.

I also wanted to give you a contemporary example in a more recognized name rather than the Chinese boneyard that I pick through. Here's LLY

The current price action suggest that it is fixin' to get ready to do something........

Here's the stock screen that I use on StockFetcher:

Close is above (XX)
AND Volume is greater than (XXXX)
AND Upper Bollinger(10) is less than Upper Keltner Band(10)
AND lower Bollinger(10) is greater than Lower Keltner Band(10)
and add column Bollinger %B(10,2) (I use this to order candidates from lowest band width to highest)

To put this post together, I didn't have to cherry pick through my stock entries to provide examples for you. It has proved to be a high probably trade and a richly rewarded trade. I will tell you that the hardest thing to do is to sell into the volatility explosion. And we know that doing the hard thing is often the right thing! I'm going to employ Market Sniper's excellent advice of holding onto a vestige of a former position--particularly if the stock gaps and goes like HPJ did. Naturally, any method you deploy must fit with your time, money and risk/reward parameters.


Glenn_in_MA said...

Couple of thoughts to give you some insight into how I think:

1. Volatility squeeze is a concept that I can get my hands great post topic. In contrast, I have found it difficult to get my hands around and therefore my mind to accept the wave theory stuff.

2.I always laugh when I see the strict TA vs Fundie arguments flare up. Who ever said you had to stick to one approach or the other? I've always believed that the blended approach is THE WAY to go. You obviously do as well.

Anonymous said...

hi there friends. I'm actually into shoes and I had been digging as far as something that particular brand. The prices as regards the sneakers are approximately 230 bucks everwhere. But finally I set this area selling them someone is concerned half price. I exceptionally like these [url=]prada sneakers[/url]. I will definetly order those. what can you tell me about these?