I want to share some thoughts about the book Volatility illuminated by Mark Whistler. I have always a problem spelling right his name but this time I think I got it right. I have not read yet the book Macro to Micro volatility trading so I will not comment it.The main idea of the book is to point out how the volatility understanding can enhance our trading.
The basic feature is the heteroscedasticity of the volatility. Please check this wikipedia article if you do not know what it means. http://en.wikipedia.org/wiki/Heteroscedasticity
The main idea as far as I understand is to trade only when we have a bigger volatility.
In fact here and this is my assumption the volatility replaces the trend as a guiding principle.
In the classical way we are looking to enter into position only we have a trend going on and classically the Average Directional Index (ADX) was revealing if we have or not a trend (in fact there is a plethora of methods for trend identification).
Well when we talk about volatility there comes into place the Bollinger bands. However here Mark Whistler replaces the moving average by volume weighted moving average. Here this is innovation because according to him the big institutional players are looking at this indicator (I do not know for sure that is his assumption). I am a little bit reserved on this because in Forex we do not have a volume, we have a tic volume and that is different, and as the market is decentralized who knows what the real volume is and the indication of the Volume Weighted Moving Average appears to me more or less arbitrary. On the other hand there are many respected traders who swear by the volume and they apply the principles of the volume analysis VSA (volume spread analysis) on Forex, there are some very interesting treads in Forex Factory. As for me I am joking and call that Tic Volume Spread Analysis and not merely Volume Spread Analysis. Maybe the truth is somewhere in the middle signifying that the tic volume reveals some information even if it is not the real volume.
The second main point is the use of indicators for tracking the volatility.
There are two indicators. The CCI indicates both direction and volatility. The WAVE-PM classifies two states: volatility and non volatility state.
The developpments about the CCI are very interesting per se. In fact Mark Whistler tries to reveal the true logic of the CCI. The ideas is to track a volatility expansion and the volatility expansion is when the CCI expands over 100 or -100, and that does not mean that the market is overbought or oversold. That means that we have a volatility expansion. According to him we have an expansion beyond 1.2 - 1.5 of standard deviations (in fact the standard deviations are not used in the formula of CCI). This zone between - 100 and 100 he calls the containment zone.
However it is a little bit more complicated than that because he uses CCI with different calculation periods in order to track it. That is because there are different subsets.
A will continue later on this topic together with my insights on it. Unfortunately my model is much, more complicated than Whistler's model because I track not only the pure market statistics but also the fractal geometry of the price time series. Here on this post I discuss some of this.
And finally comes into play the chaotic at tractors however I a little bit resilient to publish it.
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