My Life My Trade

Even those who have been trading since eons might not have seen the kind of volatility we saw last fall. Just to highlight how crazy things were, I will use two examples.

• Oct 9, 2008 to Oct 10, 2008: SPX range was 167 points (highlighted in GREEN)
• Nov 21, 2008 (Friday) to Nov 24, 2008 (Monday): SPX range was 124 points (highlighted in BLUE) – Note that the two shaded regions overlap

To put the craziness of volatility in perspective, I have posted 12 year daily chart of SPX. One can see that the SPX ranges that took almost a year to traverse were covered in period of 2 trading days – crazy isn’t it. This is not the norm – this was the exception AND will be an exception going forward as well.

A normal trading day looks more like what can be seen in the intra-day 5 min ES chart for Jun 17, 2009. How does one trade this – after seeing what we saw last fall, this just looks like random chop. Once you put on the Cumulative VWAP study onto this chart, things do not look that random anymore. One can see that for most part the ES price bounces between VWAP +/- 2 standard deviations. And the best way to trade this is to fade the moves to the extremes.

Now, the key question is when the price hits the outer envelope (VWAP + 2dev or VWAP – 2dev), when does one enter the trade. I have paper traded this for a while and have found that as the price approaches the outer envelope, if the volume declines, then the price will bounce back towards VWAP. On the other hand if the volume is not declining (as in example labeled 2 in the figure), then the price might not come back to VWAP. The exact entry timing and stop loss setting is based on personal risk profile and comfort level. Now that you are done reading this, how about some good love shared

As posted last night at 10.26pm PT, EUR/USD did keep melting up till it ran into resistance at 1.3930 and got rejected strongly.

Here is what the bigger picture looks like. 1.3760-1.3800 region is turning into a formidable support, and will not be taken out easily – which means that equities might sport a bounce here and the ES 903 (lows from the Tuesday night, Wednesday morning Globex session) might hold OR if breached, then they will be breached by a small amount only, i.e. ES 896-900 might hold for a day or two.

Here is the 5min chart for ES for today (May 22 2009). The pink line in this graph is the cumulative VWAP study on ToS charts.. See how ES has bounced off of that VWAP all day long – we think that the action is random, but it isn’t. In the morning, it touched vwap-2 and bounced back sharply from it. Combine this with TICK (I will do a more detailed post later) and you have a gold mine. For now, all I will say is that you need a very strong positive/negative TICK to push the price across VWAP onto the other side.