Volatility Band Intraday Trading System

Lockdown time gives us the opportunity to dust up some old stuff and cleanup.  Some people found the time to look at some of my old work and shown some interest in them. One such work is the Volatility Trading system for Intraday. This is simple trading system based on bands based on volatility where these bands are used as entry points and trailing stops. A brief explanation of the system is as below.

Because the volatility of a stock is its standard deviation, we can statistically establish “confidence Intervals” of the price moves. In statistics, a one standard deviation range means that there is a 68-

percent likelihood the stock price will stay within the range (a 67-percent confidence interval).  The confidence value for different standard deviations are

1.00 - 68%

1.28 - 80%

1.50 - 88%

2.00 - 95%

So, we draw bands at various standard deviation levels like 0.25, 0.5, 1, 1.28, 1.65 and 2 from the previous day’s close.  Entry is made once the price cross above a Band and the same band because the stop loss. When the price crosses above the next band the stop loss is shifted to this band value. This point can be also a “ADD ON” point.  In the same way trading can be done on the down side as well.

The formula for calculating the bands is as follows

S * M * V * (n/252)

where

S = stock price

M = number of standard deviations

V = volatility

N= number of days

When I released this system years back the Volatility value to be used in the formula was made available in my website.  Unfortunately, I could not continue with the web site.  Now I am releasing the new afl which can be used independently. The Volatility used in the formula can be Historical volatility or implied volatility. The current formula uses the VIX values of the previous day which is available from NSE web site. The High Value of the VIX is used for the higher Bands and the Low value of the VIX is use for the lower Bands. This is Intraday Trading system only. The system is ideally suited for the Index as it is based on the VIX. Soon I will provide a version for stocks which will be based on the Historical volatility of the stock itself.

I had posted a video also on the system which is still relevant. https://youtu.be/Mj5oTrvOqIQ

The AFL can be downloaded from the below link

https://drive.google.com/open?id=1soyNl8BHYac-_FWayZ-Bz3gvHn7xwJZF

VPA Version 4

Finally here is the next version of the VPA, V.4.0.  The earlier version was a step in refining the signal generation codes. However the signals were generated were too many creating a confusing picture. Also there was a error in coding which prevented the use Random walk  Index for the evaluation of the trend. In version 4.0 I have attempted to refine the signal generation coding  so we have lesser more accurate signals.

Another major change is the effort to indicate the high probability of change in the Trend. These are Sentiment Change Indicators. .  A green up Arrow indicates that there is a change of sentiment. The current down Trend may possibly end soon and we may see an Uptrend soon. A Red Down Arrow indicates that there is a change of sentiment. The current Up Trend may possibly end soon and we may see Down trend soon.  Like any signal in Technical Analysis there signal are never 100% accurate these seem to catch the majority of the trend changes. The users are advised not to use these as buy and sell signals. However these signals would be indeed good guiding sophomores.

I am also including a PDF file which provides some details of the various Flags generated by the AFL on the chart. This would help the beginner very much to understand the implication of the various Flags. This is very brief and we I will try to elaborate on each as and when time permits.

The AL can be downloaded from here :
VPA  Version 4
VPA Flags

The K-Trend System - I

Before we proceed with further exploration of the K-Trend Indicator let me share with you my Trading system based on the K-Trend Indicator. It was one of my early Indicators developed during my early days of TA journey.

The system is a simple Reversible one. The rules are follows

BUY Setup

When the momentum turns positive from negative, In other words when the K-Trend Indicator is negative and changes from negative to positive.

Buy setup = KT < 0 and KT (today) > KT (Yesterday)

The setup condition remains active for 6 Bars

Entry

Enter when the value is above the High of the Buy setup Bar+0.5 times a 5 bar Average True range.

Buy = High(Buy setup bar) + (0.5 x ATR(5) ) .  In fact the value 0.5 is adjustable.

Exit  setup

When the momentum turns negative from Positives, In other words when the K-Trend Indicator is positive and changes from positive to negative.

Exit setup = KT >0 and KT (today)<KT (Yesterday)

Exit

Exit when the value is below the Low of the Exit setup Bar-0.5 times a 5 bar the Average True range.

Exit = Low(Exit setup Bar) – (0.5 x ATR(5))

After experimenting I found that many trades were missed because the Ktrend quickly crossed above or below the zero line in less than 6 bars and the value was still less/more than the entry/exit threshold values and the stock went on to make big moves. So I added further conditions to take care of these opportunities as well. The revised Entry and Exit condition are as follows

Entry

Buy = High(Buy setup bar) + (0.5 x ATR(5) )  OR  KT cross above +40

Exit

Exit = Low(Exit setup Bar) – (0.5 x ATR(5))  OR  KT cross below -40

I found that the system was able to catch the big Trends and losses were quite limited  in the sideways moves. The system was useful for stocks which had the tendency to have some trends and useless for stocks which moved sideways most of the times.

The system has the facility to set the ATR multiplication factor which has a default value of 0.5.  Also one can set the traded quantity so the current Profit/Loss situation  is indicated exactly. 

A quick backtest on the Nifty (The Indian stock Index) is provided below.

The System can be downloaded and tested if one likes from the below link.  Looking forward to feed backs..

K-Trend System - I V.1.0