Friday, April 10, 2020

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)
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.

The AFL can be downloaded from the below link