Currency Volatility Trading Software

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Forex Market Sentiment Summary


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Market Volatility and Parity Fluctuation

Market volatility begets tangential volatility. If we consider currency tangent to equities and interest rates, huge interim ranges of 5 percent to more than 10 percent are easily understandable. More importantly, they are tradable for spectacular gains. Clearly, there are secondary and even tertiary parity considerations. Ratios between interest rates and currency value have also been referenced as interest rate parity. Ratios between stock values and currency have also been called equity parity.

Look for Price Volatility

After an investor has concluded that an ideal time has arrived for the purchase of stocks, the next question is Which stocks To answer that question one of the first features to investigate is price volatility. By reviewing a set of long-term charts an investor can quickly identify those stocks that have had a history of high price volatility and those that have had little volatility. The volatility a stock has experienced in the past tends to continue in the future. It is a result of the company's size and the nature of the markets for its products, its financial leverage, and the volume of trading in its stock, The reason for investigating volatility is simply that it is not logical to pick the perfect time to buy stocks, such as near a bear market bottom, and then select a stock that is not likely to rebound strongly because it lacks volatility. Most of the huge, mature corporations, such as the international oils and major utilities, do not have high price volatility numerous...

The Economics of Market Volatility

Many of the complaints about market volatility are grounded in the belief that the market reacts excessively to changes in news. But how news should impact the market is so difficult to determine that few can quantify the proper impact of an event on the price of a stock. As a result, traders often follow the crowd and try to predict how other traders will react when news strikes.

Measuring Bond Price Volatility

As shown in Exhibit 16.1, the graph of bond prices versus yield is convex. For market participants who own a bond, collect the coupon and hold it to maturity, market volatility is irrelevant principal and interest are received according to a predetermined schedule. But participants who buy and sell bonds before maturity are exposed to many risks, most importantly changes in interest rates. When interest rates increase, the values of existing bonds fall since new issues pay a higher yield. Likewise, when interest rates decrease, the values of existing bonds rise since new issues pay a lower yield. This is the fundamental concept of bond market volatility changes in bond prices are inverse to changes in interest rates. Fluctuating interest rates are part of a country's monetary policy and bond market volatility is a response to expected monetary policy and economic changes.

Market Volatility

TABLE 8.4 Fixed-Income Arbitrage Price Volatility Drivers ded in spread products. Although market volatility can create trading opportunities, too much volatility creates additional risks that affect the ability of fund managers to put on and maintain effective hedges. It can cause the correlation between long positions and hedges to diverge, resulting in the appreciation of the hedge and the depreciation of the long position. (See Table 8.4.)

Golden Nuggets of Wisdom

Risk Control Turtle trading is grounded in a system of risk control and money management. The math is straightforward and easy to learn. During periods of higher market volatility, trading size is reduced. During losing periods, positions are reduced and trade size is cut back. The main objective is to preserve capital until more favorable price trends reappear. The system determines crucial decisions such as

The Ultimate Investment

The current state of investment management has a lot more in common with the prescribed burns than most professionals would care to admit. In an effort to curtail naturally occurring disasters, such as the 1998 Russian ruble-inspired stock market meltdown or the equally vicious Nasdaq carnage of late 2000, investment pros have tried numerous methods of protecting their clients against the occasionally vicious whims of market volatility. Much like the Forest Service, it remains questionable whether these attempts have resulted in any positive consequences.

The Currency Options Market

The currency options market shares its origins with the new markets in derivative products and was developed to cope with the rise in volatility in the financial markets worldwide. In the foreign exchange markets, the dramatic rise (1983 to 1985) and the subsequent fall (1985 to 1987) in the dollar caused major problems for central banks, corporate treasurers, and international investors alike. Windfall foreign exchange losses became enormous for the treasurer who failed to hedge, or who hedged too soon, or who borrowed money in the wrong currency. The investor in the international bond market soon discovered that the risk on their bond position could appear insignificant relative to their currency exposure. Therefore, currency options were developed, not as another interesting off-balance sheet trading vehicle but as an alternative risk management tool to the spot and forward foreign exchange markets. Therefore, they are a product of currency market volatility and owe their existence...

Swings Bubbles And Crashes

Speculation rages, and the speed of price fluctuation has multiplied dramatically compared to previous decades. Market volatility has increased roughly in proportion to the dramatic increase in in-formation both real and imagined that is readily available. Getting in before the rise and out before the fall has become the day trader's mantra, one that reveals not only the presence of Mr. Market but the existence of his coconspirators by the thousands.

Others Irrationality Is Your Opportunity

The price volatility of a company like Noven Pharmaceuticals (NOVN) allows an engaged investor multiple opportunities to buy and sell when it suits him best (see Figure 2.1). Figure 2.1 How Market Volatility Creates Opportunities for Entrepreneurial Investors Figure 2.1 How Market Volatility Creates Opportunities for Entrepreneurial Investors

Stocks Options Futures Forex

IMPORTANT INFORMATION 6.99 per trade offer applies only to clients who open and fund a flat-fee equity account by 12 31 2008. This offer cannot be combined with any other offer. Additional restrictions apply. Terms and conditions are subject to change at any time. Intelligent order routing on flat-fee commissions may favor less expensive execution destinations including market makers. For more information please visit No offer or solicitation to buy or sell securities, securities derivative or futures products of any kind, or any type of trading or investment advice, recommendation or strategy, is made, given or in any manner endorsed by TradeStation Securities, Inc. or any of its affiliates. Past performance, whether actual or indicated by historical tests of strategies, is no guarantee of future performance or success. Active trading is generally not appropriate for someone of limited resources, limited investment or trading experience, or low-risk tolerance. There is a risk of loss...

Investments in a Global Market

1For an excellent discussion of the reasons for the development of numerous financial innovations and the effect of these innovations on world capital markets, see Merton H. Miller, Financial Innovations and Market Volatility (Cambridge, Mass. Blackwell Publishers, 1991).

The Bug Vs The Windshield

In this book, we see why widely followed strategies are likely to fail to meet an investor's goals and will incur large losses that reduce long-term returns. We also discover an explanation of investment markets that explains market volatility as well as the long-term bull and bear markets to which most investment assets are subject. This knowledge will help us develop investments strategies that will avoid large losses and meet long-term goals.

Detecting Trend Direction And Strength

They look to indicators for signs of price direction, momentum shifts, and market volatility. Among the most sought-after indicators are those that identify price trends. Traditionally, moving averages serve that purpose, but they suffer from whipsaw action during price consolidations. However, there is another approach. This article shows how to combine two popular indicators to help traders detect not only trend direction but also trend strength.

Which timeframe to trade

Drawdown and risk - can be levelled out with the choice of the most suitable futures contracts in terms of margin, volatility and liquidity. Trading intraday exposes the traders to huge unexpected price movements, energy blackout and platform inefficiencies. Conversely, trading a daily price series will raise the drawdown by a monetary absolute amount and it will also enlarge the flat equity line period. But nowadays traders have so many possibilities around the world that every account will find its appropriate futures margins and price volatility.

Dont Panic over Price Changes

Price volatility is a necessary by-product of focus investing. In a traditional active portfolio, broad diversification has the effect of averaging out the inevitable shifts in the prices of individual stocks. Active portfolio managers know all too well what happens when investors open their monthly statement and see, in cold black and white, a drop in the dollar value of their holdings. Even those who understand intellectually that such dips are part of the normal course of events may react emotionally and fall into panic. I knew from being a poker player that you have to bet heavily when you've got huge odds in your favor, Charlie said. He concluded that as long as he could handle the price volatility, owning as few as three stocks would be plenty. I knew I could handle the bumps psychologically, he said, ''because I was raised by people who believe in handling bumps. So I was an ideal person to adopt my own methodology. (OID)12 As long as things don't deteriorate, leave the...

Modeling Financial Markets

The purpose of developing models for financial markets is to end up with a means for making market predictions. One typically attempts to develop models for predicting price changes or market volatility. The hope associated with such efforts is to use the model (or models) as the basis for a computerized trading system, lb minimize equity drawdowns, most computerized trading systems use separate models for different markets and perhaps for different trading frequencies. By trading several models simultaneously, the equity decreases due to one model are hopefully balanced by equity increases from other models. Thus one would expect a smoother portfolio equity curve than what one might get by trading a single model. This well-known concept is called diversification and is discussed in most books on finance.1 Data is fed into the models, and the system issues trading directives. The directives are usually in the form of buy and sell signals.

The Volatility Mystery

You would expect that traditional measures of market uncertainty would have registered some uptick as the aberrations began multiplying and the inadequacy of the international system became more apparent. Yet the contrary occurred. For a few years leading up to the summer of 2007, several measures of market volatility actually pointed to a reduction in uncertainty, as opposed to an increase. This was part of a broader tendency for market participants to romance what became known as the great moderation that is, the belief that the world's economies had entered a period of reduced fluctuations in both economic and financial indicators. The trend of declining market volatility was evident in the measure that attracts the most attention in the financial media the VIX. Often labeled as Wall Street's fear index, the VIX is short for the Chicago Board Options Exchange Volatility Index. It is a measure of implied volatility based on the weighted average of prices for various options on a...

Selecting the Appropriate Data Series for Calibration

Investors, including actuaries, generally have fairly short memories. We may believe, for example, that another great depression is impossible, and that the estimation should, therefore, not allow the data from the prewar period to persuade us to use very high-volatility assumptions on the other hand, another great depression is what Japan seems to have experienced in the last decade. How many people would have also said a few years ago that such a thing was impossible It is also worth noting that the recent implied market volatility levels regularly substantially exceed 20 percent. Nevertheless, the analysis in the main part of this paper will use the post-1956 data sets. But in interpreting the results, we need to remember the implicit assumption that there are no substantial structural changes in the factors influencing equity returns in the projection period.

Index fund investing the relatively new passive investment strategy

With all the resources and economies of scale in their favor, if managed funds cannot beat the market with active management, what chance does an individual investor have The case for index funds has been made persuasively, and recent returns have certainly been encouraging index fund growth. Still, it's useful to keep in mind some things that index funds are not. They aren't necessarily low risk. While they neutralize many rules through broad diversification, they don't alleviate risks associated with stock market volatility, of which we've seen plenty this year. Index fund investors are unavoidably exposed to downturns in the markets they track-which is only fitting.

Current Market Statistics

Perhaps the world is changing so fast that history should not be used at all to predict the future. This appears to be the view of some traders and some actuaries, including Exley and Mehta (2000). They propose that distribution parameters should be derived from current market statistics, such as the volatility. The implied market volatility is calculated from market prices at some instant in time. Knowing the price-volatility relationship in the market allows the volatility implied by market prices to be calculated from the quoted prices. Usually the market volatility differs very substantially from historical estimates of long-term volatility. Certainly the current implied market volatility is relevant in the valuation of traded instruments. In application to equity-linked insurance, though, we are generally not in the realm of traded securities the options embedded in equity-linked contracts, especially guaranteed maturity benefits, have effective maturities far longer than traded...

Option and Stock Volatility The Central Element of Risk

The whole question of risk is central to the options decision and to maintaining the conservative structure and theme in your portfolio. The selection of options can be directly related to price volatility as one measurement of risk perhaps the most important. with average price levels and to avoid high volatility altogether. If you accept the theory that high price volatility translates to higher market risk, it is ill advised to consider writing covered calls at all. Risk levels of the stock increasing since original purchase date could signal the need for reevaluation of the company. Should you sell that stock and find an alternative issue with safer volatility levels You may be better off respecting your conservative stock standards based on fundamental analysis, writing options with typical pricing, and staying away from stocks and options with higher-than-average volatility.

Critique and Common Sense

The next chapter shows how that analogy has been turned upside down and inside out. Before going on, though, pause to consider whether common sense supports P as a measure of risk. What P really measures is the price volatility of a stock. If you insist on associating the word risk with that measure, it at most means that P captures the risk of stock price gyrations. For a market analyst, that measurement may be of some interest.

Is It a Good Investment

Buffett's view on risk drives his diversification strategy here too, his thinking is the polar opposite of modern portfolio theory. According to that theory, remember, the primary benefit of a broadly diversified portfolio is to mitigate the price volatility of the individual stocks. But if you are unconcerned with price volatility, as Buffett is, then you will also see portfolio diversification in a different light.

Completion Of The Large Quarters

How often have you seen the exact number of a Large Quarter Point being registered as a high, low, open, or close price You probably have not often seen this because price volatility has the tendency to conceal the Large Quarter Points, making them difficult to recognize. Although in some cases price moves can stop when a Large Quarter Point is reached exactly up to the PIP, in most instances, prices either surpass the exact number of a Large Quarter Point by a few PIPs or stay a few PIPs short of reaching it. In periods of high volume and volatility, prices may move beyond the exact number of a Large Quarter Point, producing an overshoot above the Large Quarter Point, while in periods of low volatility and volume, prices may undershoot a Large Quarter Point, coming a few PIPs short of the exact number of a Large Quarter Point. These overshoots and undershoots disguise the Large Quarter Points under a veil of random numbers, creating the perception of chaos and lack of purpose and...

Using Volatility as the Primary Risk Measurement

The usual method for defining market risk of stocks involves price volatility. This is a starting point. The more erratic the price trend, the greater the risk and the more difficulty you will have in trying to forecast future price movement. When a stock's trading range is broad, it further complicates the picture price volatility is a problem for stock investors because owning shares in a volatile company means valuation is on an unending roller coaster ride. It is easy to say that long-term investors should not be concerned with price volatility when living the experience, however, it can be unsettling to see a stock's value cut in half in a single trading session, double the following day, and then fall once again. It makes any form of portfolio planning difficult. Are such levels of volatility unusual They are in some market conditions. But in the bear market of 2008, high volatility was more the rule than the exception. Many traditional buy-and-hold investors suffered such high...


In the 1980s, hostile takeovers and LBO acquisitions were all the rage. Companies sought to acquire others through aggressive stock purchases and cared little about the target company's concerns. The 1990s were the decade of friendly mergers, dominated by a few sectors of the economy. Mergers in the telecommunications, financial services, and technology industries were commanding headlines, as these sectors went through dramatic change, both regulatory and financial. But giant mergers were occurring in virtually every industry (witness one of the biggest of them all, the merger between Exxon and Mobil). Except for short periods of market volatility, M&A (mergers and acquisitions) business was brisk in the 1990s, as demands to go global, to keep pace with the competition, and to expand earnings by any possible means were foremost in the minds of CEOs.

Developing a New Portfolio Theory

Today, investors are caught at an intellectual crossroad. To the left lies the pathway of modern portfolio theory. It assumes that investors are rational, the market is efficient, risk is defined by price volatility, and the only way to reduce risk is to diversity broadly. To the right lies the focus portfolio theory. It is distinctly separate and is grounded in this very different set of beliefs

Another Kind of Volatility

As long as you employ appreciated stock, you can create consistent and low-risk profits with covered calls. Price volatility is not necessary for the strategy to work. In fact, if you accept the technical risk of high-volatility stocks, it violates your conservative standards, and covered call writing makes no sense either. Your first priority should be to buy and hold growth stocks and to replace those stocks only when the fundamentals have changed. Price volatility is the starting point for identifying market risk, at least in the short term. However, a related test of safety in the stock is the level of fundamental volatility. This is the trend in reported revenue and earnings. If a company's operating results are somewhat predictable, showing similar growth patterns from one year to the next, it is a sign of low fundamental volatility. But if revenues and earnings change erratically from one year to the next, the high fundamental volatility translates to high risk on a fundamental...

Information Volatility

The first source of stock market volatility relates to information changes. Information volatility has both a positive (efficient) dimension and a negative (inefficient) dimension. There is little reason to believe that positive information volatility is any worse or better now than it was a decade or longer ago. On the one hand, there may be greater uncertainty in business value as a result of globalization, the pervasiveness of new technology, and the seeming swiftness of its change. A portion of the substantial price volatility of the late 1990s and early 2000s may be a function of such greater business volatility. On the other hand, there are also superior ways to measure business and financial risk, manage it, and adapt to these changing landscapes. With these factors offsetting each other, there seems little basis for saying that positive information volatility will get better or worse in the future.

The Secondary Markets

Other new sources of competition for the NYSE come from abroad. For example, the London Stock Exchange is preferred by some traders because it offers greater anonymity. In addition, new restrictions introduced by the NYSE to limit price volatility in the wake of the market crash of 1987 are viewed by some traders as another reason to trade abroad. These so-called circuit breakers are discussed below.

Should You Buy Options OTC Stocks New Issues

I do not think most investors should buy or sell options. Options are very speculative and involve substantially greater risks and price volatility than do common stocks. Winning investors should first learn how to minimize the investment risks they take, not increase them. After a person has proven he or she is able to make money in common stocks and has sufficient investment understanding and actual experience, then the limited use of options might be intelligently considered.

Currencies Trading Volume

Table 3.2 summarizes the trading activity of selected futures contracts in currencies, precious metals, and some financial instruments. The volume and open interest readings are not trade signals. They are intended only to provide a brief synopsis of each market's liquidity and volatility based on the average of 30 trading days.

Transaction Volatility

The second source of stock price volatility is transaction-related.18 This arises from the way prices are formed by market trading. It is not possible for any party acting alone to set the price of a stock. Share pricing in stock markets arises solely as a result of traders' orders meeting in the market. How they meet in the market to determine prices is important to know but often overlooked. The case is cloudier yet when you add the move toward 24-hour trading. Market volatility tends to lighten when trading sessions are interrupted, as occurs on the Thursday following Ash Wednesday, for example. However, some of the greatest market plummets have occurred on Mondays, following two days off. Whether continuous trading will promote or retard efficiency is thus hard to predict, though one lesson from history suggests the latter. The Evening Exchange operated in New York in the 1860s as a place to continue trading stocks and gold after the NYSE's regular daytime hours. It lasted only a...

Active commodity strategies that benefit from structural returns in the commodity markets

The existence of storage can act as a dampener on price volatility since it provides an additional lever with which to balance supply and demand. If there is too much of a commodity relative to demand, it can be stored. In that case, one does not need to rely solely on the adjustment of price to encourage the placement of the commodity. If too little of a commodity is produced, one can draw on storage price does not need to ration demand.

Risk Budgeting And Active Risk

As is evident from equation (13.4), the manager's tracking error, or active risk, increases when the beta deviates from 1.0, increases when the volatility of the index increases (if p. does not equal 1.0), and increases when the residual risk increases. It is also evident from equation (13.4) that there are two risk characteristics that managers can control, and one that they cannot. Specifically, managers can control their market exposure (P.) and the amount of residual risk (e.) they take. They cannot, however, control the level of market volatility (c) Thus, managers who want to reduce the impact of market volatility on portfolio risk should seek to keep pi close to 1.0.

Diversification in a Single Factor Security Market

We have just seen that when forming highly diversified portfolios, firm-specific risk becomes irrelevant. Only systematic risk remains. We conclude that in measuring security risk for diversified investors, we should focus our attention on the security's systematic risk. This means that for diversified investors, the relevant risk measure for a security will be the security's beta, p, since firms with higher p have greater sensitivity to broad market disturbances. As Equation 6.7 makes clear, systematic risk will be determined both by market volatility, ctM, and the firm's sensitivity to the market, p.

Initial Stop Solution or Problem

If you use an initial stop at all, use stops that follow money-management rules but are derived from system design and market volatility. A good idea is to use a 2 percent of equity initial stop, and then use maximum adverse excursion (MAE), a distribution of the worst loss in winning trades, to select the dollar value of the stop for a particular system. Relate the MAE to some measure of market volatility before calculating the number of contracts. Thus, the initial stop meets three criteria There are two broad types of systems, those that are self-correcting and those that are not self-correcting. Self-correcting systems have rules for long and short entries. Such systems will eventually generate a long signal for short trades and vice versa. Because these systems are self-correcting, the reverse signal will limit losses, even without an initial stop. Of course, the losses will depend on market volatility, and easily could be as large as - 10,000 per contract.

Lessons for Investors

Not all firms that report stable earnings are good investments. At the minimum, you need to consider whether these firms offer any growth potential, whether earnings stability translates into price stability and finally, whether the market is pricing these stocks correctly. It is no bargain to buy a stock with stable earnings, low or no growth, substantial price volatility and a high price earnings ratio. Reverting back to the sample of all firms in the United States, the following screens were used

Differential Source Of Returns To Managed Futures Hedge Funds And Traditional Assets

Hedge fund managers often track a particular investment strategy or investment opportunity. When appropriately grouped, these hedge fund strategies have been shown to be driven by the same common market factors, such as changes in stock and bond returns or stock market volatility, that drive the traditional stock and bond markets. For instance, Table 3.6 reports the performance of various hedge fund strategies relative to stock and bond markets as well as other factors that have been shown in prior As expected, results show that equity-biased hedge fund strategies have a high correlation with the same factors as long equity strategies (for example, the S&P 500 Index). In contrast, managed futures universe returns are not correlated with the stock and bond markets or changes in equity market volatility, but track indices that reflect trend-following return patterns. As Table 3.7 shows, certain managed futures strategies, which are systematic and trend-following in nature, are highly...

Position and Price Limits

Price limits, also called daily trading limits, specify a maximum price range allowed each day for a contract. Typically, these limits can be expanded under special provisions during periods of extreme price volatility. Further, price limits are frequently lifted during the delivery month of a futures contract. The daily price limits for CBOT futures contracts appear in their individual contract specifications on, as do position limits.

Ini increases and levels off as tial stop we loosen the initial stop

You can now use the cumulative frequency distribution to select a stop based on market volatility. An arbitrary stop may be too tight or too loose. This analysis assumes that you use the same dollar stop on every trade. If you vary the initial stop on every trade then this analysis will be of little use to you. We already know that stops are hit more frequently during trading range markets. Hence, you could use some measure of trendiness to vary your initial stop.

Does Your Design Control Risks

A trailing stop is a popular method to control portfolio volatility and protect profits. A trailing stop is simply a stop order that is placed some fixed distance away from the highest profit point in the trade. When the market reverses, or when market volatility increases, this stop will be touched off and will protect your profits. If you are using long-term systems that are slow to react to trend changes, then such a stop may smooth out your equity curve.

Introduction to Valuation

Before taking the plunge, some of the questions you might want to ask are the following Do underlying economic conditions justify the high current level of stock price volatility Has the stock market become a vicarious thrill for those who aren't drunk enough to run with the bulls Has the random throw of darts become investors' preferred approach for choosing stocks Most importantly, now that you've seen that stock prices go down quicker than they go up, you may want to find out how much a stock is really worth before investing your hard-earned money.

How Much Institutional Ownership

To begin with, it's not as easy to find stocks without any institutional ownership. It's estimated that institutions own at least 50 percent of the entire stock market. So how much is enough, and what constitutes too much institutional ownership If the problem caused by institutions is price volatility, perhaps that should become the issue rather than the amount of ownership.

Testing market efficiency

Academics and practitioners have long argued about the consequences of option listing for stock price volatility. On the one hand, there are those who argue that options attract speculators and hence increase stock price volatility. On the other hand, there are others who argue that options increase the available choices for investors and increase the flow of information to financial markets, and thus lead to lower stock price volatility and higher stock prices.

Macroeconomic Influences

In addition to structural inefficiencies that can be captured by investors, there are fundamental factors that dictate the strength or weakness of various currencies. Although currency is a transfer of wealth mechanism rather than an asset per se, the volatility in valuations among different currencies creates opportunities for trading profits. In this sense, currency volatility is a potential source of return. There is no implied rate of return for currency as there is in equities, which can be valued through the dividend discount model. Nevertheless, there are macroeconomic influences that cause currency exchange values to fluctuate. Macroeconomic factors that affect

Deciding How to Establish Your Policies

You can probably relate to all these questions because they have a familiar ring. If you have observed trends over time, you know that the price gyrations occurring this week and this month have a short-term aspect and a long-term aspect. You are keenly aware of what occurs from one day to the next, and you see daily reactions to political and business news, to earnings reports, to rumors of economic trends, and to an unending number of other reasons for prices to rise or fall. But in the long-term context, short-term price changes and the daily reasons for price volatility really have nothing to do with long-term value. Conservative investing emphasizes fundamental corporate strength competitive position, excellence of management, diversification, healthy capitalization, consistent dividend record, and so on and is based on faith in long-term fundamental indicators. With this in mind, it is most logical to invest in high-quality stocks, monitor the fundamentals, and ignore short-term...

Financial Tenet To EVA or Not to EVA That Is the Question

First, the EVA formula is based on the CAPM, which relies on price volatility to measure risk. We already know Buffett's opinion on the idea that a more volatile stock is riskier. Second, because cost of equity is always higher than cost of debt, in the EVA model the cost of capital actually declines when the relative

Basing Decisions on the Fundamentals

Conservative portfolio management is based on the fundamentals. Short-term price volatility a technical indicator can also be an early warning of emerging changes in the fundamentals. If volatility is a symptom of other problems notably, of changes in fundamental strength watching prices carefully is a smart suggestion. It is not reliable, however most market theories agree that short-term movement cannot be used as a predictive tool. When price volatility does appear, it is worth checking. It may serve as a signal of some kind, so seeking confirmation in the fundamentals just makes sense. If price volatility is related to a serious decline in fundamental strength, it helps identify a change far earlier than do traditional methods. Price volatility does not consistently provide early signals much of the short-term volatility represents marketwide short-term trends, overreaction to news and events, or buying and selling trends among institutional investors that have little or nothing...

Foreign Exchange Volatility Trading Models

4.6.2 The currency volatility trading models The trading strategy adopted is based on the currency volatility trading model proposed by Dunis and Gavridis (1997). A long volatility position is initiated by buying the 1-month To this effect, the first stage of the currency volatility trading strategy is, based on the threshold level as in Dunis (1996), to band the volatility predictions into five classes, namely, large up move , small up move , no change , large down move and small down move (Figure 4.4). The change threshold defining the boundary between small and large movements was determined as a confirmation filter. Different strategies with filters ranging from 0.5 to 2.0 were analysed and are reported with our results. The currency volatility trading strategy was applied from 31 December 1993 to 9 May 2000. Tables 4.3 and 4.4 document our results for the GBP USD and USD JPY monthly trading strategies both for the in-sample period from 31 December 1993 to 9 April 1999 and the...

Cap your losses and get your profits

Stop-loss orders should not be so tight that normal market volatility triggers the order. From experience, it is much wiser to have a wider but reasonable stop than to have an unreasonably tight stop. Generally, a stop-loss order should not be shifted in the losing direction while a position is opened.

Example 133 FRM Exam 1999Question 86Market Risk

B) Price volatility because bond prices are positively correlated c) Yield volatility for bonds sold at a discount and price volatility for bonds sold at a premium to par d) Yield volatility because it remains more constant over time than price volatility, which must approach zero as the bond approaches maturity

Which government bonds will perform best

The normal pattern for the relationship between different maturities of government bonds, in other words the normal shape of the yield curve, has been an area of extensive, and often inconclusive, research in macroeconomics. The historical pattern is clear on two things. First, there has normally been an upward-sloping yield curve - in other words, longerdated Treasury bonds have offered higher yields and returns than shorter-dated government bonds, in particular Treasury bills. (See Appendix 1 for definitions of Treasury bonds and Treasury bills.) Second, the extent of this premium varies over time. This is often described as the term premium that short-term investors need to be offered to tempt them to buy longer-dated bonds (because such bonds are subject to price volatility). But insurance companies do not need to be paid a term premium because longer maturities provide their natural habitat .

Effect of Initial Money Management Stop

We have so far placed our stop using a dollar figure without accounting for market volatility. However, whereas in the coffee market, a 1,000 stop may seem too tight, in the corn market it may seen too wide. Thus, in some markets, a given stop will work like a stop near the left edge of Figure 4.12, and, conversely, in other markets, the same dollar stop will work like a stop on the right side of the figure.

Initial money management stop

We can get around this problem by using a volatility-based initial money management stop. For our calculations, we can set an initial money management stop as a multiple of the 15-day SMA of the daily true range for measuring volatility. We use the same continuous contracts as in Table 4.2 to test the U.S. bond market with volatility-based stops ranging from 0.25 to 3.0 times the 15-day SMA of the daily true range. Variation In profits and drawdown with volatility-based stop for US Bond market

Volatilitybased initial money management stop

Other calculations (not shown) show that the largest winning trade is affected only a little by the initial stop, since these trades usually are profitable from the very beginning. You may set a volatility-based stop or a hard-dollar stop with equivalent results. You may have to set a different dollar stop for each market, although you could use the same volatility stop across all markets. Note that with a volatility stop, the actual dollar amount changes over time, aad hence you must ensure that this stop is within your overall hard-dollar limits for risk control.

Largest losing trade increases as MMS Increases

Figure 4.15 Largest losing trade for sugar using the 65sma-3cc trading system increases as the volatility-based initial money management stop increases. Volatility based initial MMS for Sugar Figure 4.15 Largest losing trade for sugar using the 65sma-3cc trading system increases as the volatility-based initial money management stop increases.

Reading the Stock Market

There are two factors at play the risk in the known businesses and the swings in option value. As noted earlier, option values are very sensitive to changes in underlying asset values and time. So, as expectations about current businesses shift - by extension affecting the options they support - the market values of these companies swing wildly. The resulting high share price volatility speaks more to changes in option value than to current business value.

Options Used for Riding Out Volatility

Everyone has to contend with short-term price volatility. As a conservative investor, you focus on fundamental attributes of the company and use short-term indicators only to test your ongoing assumptions. If those assumptions change, your hold strategy may become a sell. However, as long as you intend to continue holding stock, options can be valuable in riding out short-term volatility as an alternative to profit taking in the traditional manner. With options, you can minimize short-term losses and even take profits while continuing to own shares of stock.

Implied Volatility And Other Measures Of Downside Risk

In the GBM model entire variability is reflected by a surprise, which is a realization of the standard normal, dz N(0,1). There is a one-to-one relation between any option's price C and o from (5.3.1). In the context of data analysis, note that data on C, S, X, risk-free rate, and T, t are readily available and that the value of o can be uniquely inferred from the formula (5.3.2). The inferred value of o is called implied volatility, Campbell et al. (1997, p. 377). Options Clearing Corporation (OCC) owned by the exchanges that trade listed equity options, ( defines implied volatility as the volatility percentage that produces the best fit for all underlying option prices on that underlying stock. Data are available for implied volatility based on both call and put options denoted here as callv and putv respectively. Clearly, putv represents a forward-looking nonsymmetric option market measure of downside risk.

How To Develop An Exit Strategy

Accurately gauging risk is very important when you are investing. You need to determine how much you can afford to lose, which, in turn, will have an effect on the duration of your trades and what kinds of stop losses or exit strategies you should use. If you want less risk, use a tighter stop. If you want the greatest possibility of profit from a longer-term trade and can afford it, set wider stops, and decrease the size of your position accordingly. Stops always should be set at levels where the normal market volatility is less likely to reach them.

Dynamics Of Disagreements

The extent and intensity of the disagreements among investors vary over time, and those variations cause market volatility and cycles. Some investors adopt the long-term averages as their assumptions and invest accordingly, putting them at odds with other investors most of the time. There are groups of investors who are almost always bullish or bearish (that is, optimistic or pessimistic). Most investors reassess their investment outlooks at intervals, using a variety of theories, strategies, and models to evaluate information and adjust their portfolios. Because the mass of investors are using different analytical tools and are regularly reevaluating their outlooks, the range, or state of disagreement between these investors differ over time and move the markets. Here is but one example ofhow the mistakes ofindividual investors influence market volatility and cause market prices to be mistaken. A group of investors can develop a theory that an upcoming event is likely to have an...

Swiss Franc 10 percent

The low-yielding Swiss franc served its role of a funding currency to carry trades targeting higher-yielding currencies and growth alternatives such as stock indexes, individual stocks, oil, and gold. Consequently, the franc came under sharp pressure during periods of rising risk appetite and low market volatility during which investors leveraged their investments in the rallying markets by borrowing in cheap francs. Conversely, the franc rallied significantly as those trades were unwound during periods of rising volatility. During the weeks of surging volatility, on March 2, August 17, and November 9, the S&P 500 dropped 5.2 percent, 6.5 percent, and 4.7 percent respectively, while the Swiss franc rallied against the USD and AUD by 0.2 percent and 2.9 percent, 1.7 percent and 9.0 percent, 3.3 percent and 4.4 percent respectively.

Figure 422 The CBPB gave a low risk entry into the new trend for the March 1995 US bond contract

We have previously stated that the initial stop should depend on market volatility. For example, the 1,500 stop may be too close given the volatility of the S&P-500 market. For the CB-PB system with exit on the 50th day using a 5,000 initial stop instead of the 1,500 initial stop, the profits dropped for all markets in Table 4.9 except S&P-500. Profits for S&P-500 increased to 141,840 on just 55 trades with 56 percent winners, a 2,579 average trade. The maximum drawdown was - 24,795, with the profit factor increasing to 2.29 from 1.62. Hence, the initial stop will influence overall system performance.

Factors Affecting Bond Prices

Where a larger proportion of the present value of a bond's cash flows (i.e. its price) is due to cash flows in later years, then a change in yield will have a greater impact on the price. Bond price volatility increases (steeper price yield curve) the lower the coupon rate (since more of the present value is represented in the final year redemption amount), and or the longer the maturity (assuming the required yield does not equal the coupon rate - when the bond would sell at par until maturity - then the bond price will increases or decrease to the redemption amount). Example B2.12 Bond price volatility coupon and maturity effect

The Rest of the Story

While loser stocks seem to earn above-average returns if held for long periods, there are clear dangers with this investment strategy. The first is the proliferation of low priced stocks in the portfolio results in high transactions costs for investors. The second is that loser stocks may be exposed to more risk, both in terms of price volatility and in terms of high financial leverage - loser stocks tends to have higher debt ratios. The third is that negative returns usually happen for a reason. If that reason, whether it be poor management or a loss of market share, is not fixed, there may be no catalyst for prices to increase in the future.

How Beliefs Roil Markets

Three measures of beliefs in the market are important. The distribution of beliefs among investors determines whether a market generally is optimistic, pessimistic, or neutral. The distribution influences whether prices are above, below, or near the fundamental value of an asset. The distribution also contributes to market volatility. The correlation of beliefs is the extent to which the beliefs and outlooks of investors shift together. A high correlation will lead to market volatility and is a factor in the length of an investment regime or cycle. Finally, the persistence of beliefs also influences the

Working with Tick Data

Trading opportunities are largely a function of the data that identifies them. As discussed in Chapter 7, the higher the data frequency, the more arbitrage opportunities appear. When researching profitable opportunities, therefore, it is important to use data that is as granular as possible. Recent microstructure research and advances in econometric modeling have facilitated a common understanding of the unique characteristics of tick data. In contrast to traditional low-frequency regularly spaced data, tick data is irregularly spaced with quotes arriving randomly at very short time intervals. The observed irregularities present researchers and traders with a wealth of information not available in low-frequency data sets. Inter-trade durations may signal changes in market volatility, liquidity, and other variables, as discussed further along in this chapter.

Riskneutral Valuation

* Risk-neutral valuation is without doubt the single most important tool for the analysis of derivative securities. It arises from one key property of the Black-Scholes differential equation (10.20). This property is that the equation does not involve any variables that are affected by the risk preferences of investors. The variables that do appear in the equation are the current stock price, time, stock price volatility, and the risk-free rate of interest. All are independent of risk preferences.

Quantitative Hedge Fund Strategies

This basic long short strategy is based on contrarian strategies, in which one buys the losing stocks and sells the winning stocks. In theory this strategy provides liquidity to the market which reduces market volatility and creates greater balance by providing desirability to the losing stocks and greater inventory (through the selling) of the winning stocks. This strategy has the possibility of generating good returns for hedge fund managers and their investors.

Rolling Forward and Up Exercise Avoidance

Rather than seeking forced exercise, most conservative investors prefer to keep ownership of the stock and use options to maximize short-term income, hopefully in a repetitive fashion. So, exercise avoidance is a far more attractive strategy for most people. In some instances, a stock's trading range remains narrow enough that option profits can be achieved with little effort or lost opportunity risk relatively low price volatility means there is little chance of exercise. However, a stock's price can exceed the strike price, which makes it a viable conservative strategy to avoid exercise.

Adding Exit Rules to the 65sma3cc System

As an alternative to the entry-triggers-exits approach, you can consider many exit strategies. One simple rule is to use a fixed-dollar trailing stop. In this case, you will set a stop, say, 1,500 away from the point of highest equity in the trade. Instead of a fixed-dollar stop, you can use a volatility-based stop, which sets a stop some multiple of the true-range away from the point of highest trade equity. Yet another exit strategy is to use a time-based stop, such as the price extremes of the last w-days. Another effective exit strategy is to exit on the close of the w-th day in

Dumpling Tops and Fry Pan Bottoms

Figure 18 illustrates the Dumpling Top. The Gap is the crucial sign in this pattern. Once the gap occurs, the downtrend should prevail for a number of days. Prior to the gap, there is so little price volatility, nobody would be interested in what was occurring in this stock. The Candlestick investor gets a forewarning of a profitable trade.

Common Mistakes and How to Avoid Them

Giving too much credence to technical (thus, short-term) indicators. Every investor who follows the fundamentals is susceptible to temptation. Following price trends is easy the information is updated every day and it is easy to find. So it often occurs that even with a lot of fundamental groundwork, decisions end up being made based on price movement and other technical indicators. This is why profit taking is so common, and why so many fundamental investors end up making mistakes (like buying high and selling low instead of the other way around). If you stay with long-term fundamental indicators as a guiding force, you will be more confident in ignoring short-term price volatility.

Dynamic Momentum Index

This approach to creating a dynamic, variable-length RSI, which changes the number of days based on market volatility, can be used to change the calculation period of any technique.8 In the Dynamic Momentum Index (DMI), the length of the calculation period increases as the volatility declines. You may also select a pivotal period, one around which the calculation period will vary for the RSI this will be 14 days. When the volatility increases, the periods will be less than 14 days and when volatility declines it will be greater. Based on this,

Price Distribution Systems

Price movement is usually viewed as a chart on which each new time period is seen as a new bar or point recorded to the right of the previous prices. There are many applications that need to look at the way prices cluster, or distribute, rather than sequences of patterns. In options, it is important to evaluate the current market volatility to decide the chances of prices remaining in a specific range for a specific amount of time. To get that value, we use the standard deviation calculation first introduced in Chapter 2. The standard deviation gives the most basic measure of price distribution. From the value of 1 standard deviation we can estimate the chances of a price remaining within a range over time. The key values to remember are that 1 standard deviation defines 68 of the price movement (both up and down), 2 standard deviations contain 95 , and 3 standard deviations contain 99 of all price movement based on the sample of data used to calculate the standard deviation value.

Standard Deviation Bands

Bollinger bands also describe market volatility. A relatively narrow band translates into low volatility. By comparing a 21-period Bollinger band with a 65-period band, you can see the relative difference between shorter-term and longer-term market volatility in Figure 18-1. The thicker lines, representing the 65-period calculation, cross the short-term band at points that show relative overbought and oversold situations. If this was a daily rather than a 15-minute chart, the 21-period band would give monthly volatility and the 65-period band would be quarterly volatility, useful values for options traders.

Derivatives Markets and Risk Management

China's derivative market is limited to several basic but important instruments. Until July 2005, the policy of fixed exchange rate with the U.S. dollar eliminated the need for managing currency risk. Since July 2005, China has allowed its currency to float within a narrow band against a basket of currencies. There has also been partial deregulation of interest rates. Gradually corporations and investors will need to manage both foreign exchange and interest rate risks. Stock market volatility and speculation and credit risk present promising potentials for new financial instruments. This chapter discusses several derivatives that trade in China's capital market and reviews some of the products that are coming soon.

Channel Breakout on Close with Volatility Exit

Sometimes there is a big move against the established trend when a consolidation is at hand. A volatility criterion can pick off the big move against the trend. We want a trailing exit for which we do not have to specify the .r-day look back period. In effect, we will create a volatility-based trailing stop. There are many different types of volatility-based exits. You can use a 10-day simple moving average of the daily trading range as your measure of volatility. The daily trading range is the difference between the day's high and low. If the market is trading in a narrow range, then the daily range decreases and volatility decreases. However, volatility increases when the market makes large daily moves. For example, near the end of a swing move, the market will often have a wide range day in the direction opposite the trend. The volatility exit closes a trade when there is a large daily move against the trend. For example, sudden market moves with an expanded daily range occur where...

Channel Breakout Pull Back Pattern

Hence, a bias to the long side may be correct only 50 to 70 percent of the rime. It is also difficult to find consistent exits, since the markets do not follow the same script every rime. Hence, another difficulty with the CB-PB system is finding a consistent exit strategy. A third area of difficulty is where to place the initial stop. If the market rolls over and starts a new downtrend, then an initial stop is critical for risk management and loss control, whether it is a simple-dollar stop or a volatility-based stop.

Zones for Forecasting Range and Risk Control

Statistics have proved that, barring a superior forecasting method, the best estimate for tomorrow's price is today's price. That is, under most conditions, we cannot predict with any certainty that prices will go up or down tomorrow therefore, the best estimate is to say that prices will be unchanged. However, if a trend system, such as a moving average, has been profitable, then its forecast for tomorrow is better than the mean. Market volatility, based on price changes, can be used with a directional forecast of tomorrow's price to create a set of zones used to control risk or project the probable trading range.2

Brett N Steenbarger PhD

Much more experimentation remains to be performed. How are the biofeedback readings (reflecting sustained concentration and mental effort) affected by large increases in market volatility or position size By holding period By the nature of the trading system Do successful traders sustain significantly different readings from unsuccessful ones How much individual variability in readings occurs during hot and cold trading periods 1. An assessment of current price behavior Is buying pressure expanding or contracting is selling pressure expanding or contracting is price volatility expanding or contracting

Channel Breakout System with Inside Volatility Barrier

This section will show you how to set up a volatility-based barrier. In an interesting twist, we will set the barrier inside the 20-day price channel (see Figure 5.7). We will have more trading opportunities because the channel will be narrower. The width of the barrier acts as a filter that cuts off trades. You should understand the interaction between volatility and channel width very clearly. If the volatility is low, then the relative channel width will widen. However, if the volatility is high, the actual channel width will be narrower. As volatility increases this system will trade more frequently.

Leverage and Directionality

Leverage is difficult to define in risk terms unless the structure of the alternative investment is understood. The degree of directionality of an investment informs this structure. Although the total gross leverage that supports an investment may be sizable relative to the equity invested in the transaction, some alternative investments are hedged. For example, a fixed-income arbitrage hedge fund may utilize 5 or 10 times gross leverage, but it may have largely offsetting long and short positions. The net directional exposure in this regard may be considered quite small. Generally speaking, gross leverage equates to the value of all long plus short positions divided by the equity invested in all the positions, while net leverage equates to the value of all long positions minus the value of all short positions divided by the equity invested in all positions. Under a hedged circumstance such as that expressed by low net leverage, the potential for loss and gain from volatility will be...

Concluding Remarks

From the list, points 1 to 6 are chosen by the potential buyer seller of the option. Points 7 to 9 are given by the market and lastly, point 10 is the only unknown factor. It represents the anticipated market volatility expected for the life of the option and is determined using the option pricing models discussed earlier.

The Risk Return Balance

Let's now examine what sorts of risks are inherent in a trading system. In the same way that we should not confuse the risk of a portfolio with the risk of a trading strategy, we should not confuse the risks of the stock market in general with the risk of a trading strategy. The stock market risks are very well known, and measures of market volatility or periodicity of crash occurrences can indicate how risky a market is. In order to lower

Option Pricing Using the Black Scholes Model

Dramatically increases do we see a commensurate rise in the option value. This relationship between changes in futures prices relative to the option is called delta and is signified by the Greek character A. Delta is a volatility measurement that also provides insight into the most anticipated price movement. Extreme futures price volatility translates into a higher chance the strike can be achieved. This shows up in the change in option premium.

Noncorrelation can markedly decrease volatility and risk under a formula that is very carefully and strictly adhered to

High interest rates may put some of these strategies under stress low interest rates might put others under stress. Market volatility may be helpful to some strategies and difficult for others. But the direction of the market will not be a key indicator or driver of growth.

And Valuation of Bonds

What is meant by the duration of a bond, how do you compute it, and what factors affect it What is modified duration and what is the relationship between a bond's modified duration and its price volatility What is the convexity for a bond, how do you compute it, and what factors affect it Under what conditions is it necessary to consider both modified duration and convexity when estimating a bond's price volatility

Shifting the Volatility Base

Solution for analysts who realize that volatility increases with price, but it falls far behind during major bull and bear markets. A reasonable representation of long-term or underlying risk is the adjusted, lognormal price-volatility relationship. Although volatility may vary greatly at any price level, this relationship establishes a foundation for the normal level.

Risk Factors in the Retirement Portfolio

Investors often ignore financial market risk by assuming a constant rate of return from their retirement portfolio, that is, no market volatility. As a result, they make inappropriate decisions in asset allocation and product selection. To illustrate the impact of the constant-return assumption, consider the following case. Assume a forty-five-year-old investor has a 300,000 portfolio invested in 60 percent stocks 40 percent bonds.1 He is currently

The Cost of Common Equity and Shares Outstanding

There is much debate about how to measure or estimate the equity risk premium. Rerp is an expectation of the excess return associated with the investment in a diversified portfolio of common stocks versus the expected return of a risk-free security. It is the additional return that an investor expects to receive above the yield of a risk-free security to compensate for the price volatility associated with the stock market.

Trading And Trading Costs

In a dealer market, an individual known as a dealer or market maker stands ready to buy or sell securities from his own account. The dealer profits from the bid-asked spread. The size of this spread is determined by a number of factors including, the volume of trading in the security, the security's price volatility, and the number of other dealers trading this security. The greater the trading volume in a security the narrower the bid-asked spread should be because dealers will have an easier time managing their inventories. Likewise, lower price volatility should lead to lower inventory risk and hence should narrow the spread.

Average Win Loss Per Trade

Suppose you make a particular amount of money in January and the same amount in February. You might be tempted to conclude that you traded equally well in the two months. That would be a mistake, however. If you had placed 50 trades in the first month and 100 in the second month, then you can see that more trading did not produce more profit. Your average profit per trade actually declined. This suggests that at least some of your trading is not providing good returns, and that bears investigation. The situation is similar to that of a business that opens five new stores in a year, but reports the same sales volume year over year. The average sales per store have actually declined, an important factor masked by the increase in overall activity. Average win loss per trade will vary with your position sizing and with overall market volatility. Be alert for occasions in which market volatility may increase, but your average win per trade goes down you may not be trading as well in...

Vietnamese Stocks Broke Before Dong

If the reaction in Vietnamese bonds to currency volatility was negative, as we should expect, what was the reaction in Vietnamese stocks Here we can compare the relative performance of the Hanoi Stock Exchange index to the S&P 500 in USD terms, but we can do it only from July 14, 2005 onward. Remember, they call these frontier markets because they involve borderline lunacy to trade them.

Sources Of Fixed Income Risk

Before we begin the discussion of the various risks taken in fixed income portfolios it is necessary to understand what risk means in a fixed income context. After all, fixed income instruments have fixed cash flows and therefore no risk. Right Also, many have said that it doesn't matter if the price of a bond goes down because you can always just hold it to maturity and therefore the price volatility of a bond is not important. While it is true that due to the nature of fixed income securities they are

When Goals Hurt Performance

Would be Wendy Whelan, the ballerina, who has learned to execute jumps the same way each time in a ballet, or Tiger Woods, who has achieved remarkable consistency in his swing. While traders need consistency, theirs are not skills that are repeated the same way across performance situations. Because markets and market conditions vary, it is rare for traders to take positions the same way day after day. Highly specific goals may therefore be of less help to a developing trader than to, say, a professional bowler. Goals would need to be sufficiently broad as to allow traders to adapt to changing situations. Placing stop-loss points based upon market volatility and recent support resistance is a broader and more flexible goal than placing stops a fixed distance from one's entries.

More Ideas on Setting Stops

Stop-losses are typically placed below or above a previous low or high. We prefer to set stops as a function of market volatility. Look at some recent charts for the pairs you trade and the data and time frame you will use to actually execute a trade. Average the subtrends in the major trend direction and average the subtrends in the minor trend direction. Redo these averages occasionally to also get an idea of how volatility is shifting. Use the information to set price objectives and also stops. The technique may also be utilized for entry point purposes.

Hedging Option Portfolios In Practice

Option traders tend to use delta, gamma, and vega measures to quantify the different aspects of the risk inherent in their option portfolios. They then consider different possible future scenarios for movements in the stock price and the stock price volatility. If the downside risk is acceptable, no adjustment is made to the portfolio if it is unacceptable, they take an appropriate position in either the underlying security or a traded portfolio.

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