The purpose of this thread is to develop and compare volatility based trading concepts. Volatility is the base of options trading, but it is also an essential ingredient in directional trading concepts that primarily rely on momentum indicators or cycle indcators.
Some of the better known volatility based concepts:
Range, True Range, historical and implied volatility, normalized volatiliy.
Keltner Channels: Based on a center line and a pure measure of volatility.
Bollinger Bands: This is a bastard as it uses the standard deviation which uses both volatility and directional bias.
The Squeeze: Compares standard deviation to true range and finds period with a lack of directional bias.
Pivots: Establish targets based on yesterday's range.
Opening Range Breakouts: In both versions of the opening range breakouts of Toby Crabel and the ACD system of Mark Fisher an expansion of volatility is expected after a narrow range or balancing day. Fisher uses the width of the pivot range, where Crabel relies on narrow range and inside bars (NR7, IR4).
MAE: The Maximum Adverse Excursion is a volatility measure used to measure system drawdowns and to establish trailng stops.
So far nothing new, so why another thread on this subject? :suicide:
With volatility based indicators there is a catch:
They only work on time-based charts. They do not work on tick charts, they do not work on volume charts, range charts and Renko charts. They do not work anywhere, except on good old minute charts.
So if you have a KeltnerChannel on your range chart, that is something interesting, but not a measure of volatility, as the intrabar volatility has been completely eliminated. Same applies to Bollinger bands on tick charts or the average true range on volume chart.
This does not mean that these indicators are absolutely worthless, it simply means that they do not represent volatility. I want to start this thread with some examples, how to display volatility correctly on other than time based charts.