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     tony_m
Member
Username: tony_m
Post Number: 666
Registered: 01-2003Rating: N/A
Votes: 0
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| | Tuesday, May 30, 2006 - 08:15 am: |  
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There has been a bit of forum chatter in various threads about volatility as an indicator of market tops or impending corrections. The theory is that increasing price volatility is a leading indicator of a potential top.
I decided to see if there was some way of charting this so I have been playing with 2 options, using ATR or a volatility indicator, in this case Chaikin's volatility.
I found it difficult to get any sense from ATR but it is a different story it seems with Chaikin's, maybe it has some merit. I found that using daily charts, in this case on the XAO produced too much noise but weekly charts seemed to produce fewer extraneous indications.
Chaikin's has 2 variables, one is a moving average of the difference between the high and low prices and the second is the rate of change of that moving average. The recommended setting is 10 for both.
I played around with various settings on a weekly chart of the XAO and settled on 7 as per the chart below. The pattern seems to be that volatility falls below zero in the early part of a trend but tends to climb back above zero as the trend stage matures.
I found that if the trace crosses above zero and approaches +20 it appears to be a reasonable predictor of an imminent top. Now maybe this is just a coincidence but you can see from the attached chart that this pattern has preceded every major correction since the October correction last year. I might add that this process is a bit meaningless with choppy non-trending price action.
Interested in your comments.....Tony_M
(Message edited by tony_m on May 30, 2006)
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hilarius
Member
Username: hilarius
Post Number: 1831
Registered: 04-2004
Rating: N/A
Votes: 0
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| | Tuesday, May 30, 2006 - 09:00 am: |
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Good work Tony
Covering over the right hand portion of the chart so that all you see is the situation up to a given day ... when would you have acted using the Chaikin signal and what form would the action have taken?
Hilarius
I come in peace to share my thoughts and to shine my candle light on possible long term opportunities
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tony_m
Member
Username: tony_m
Post Number: 667
Registered: 01-2003Rating: N/A
Votes: 0
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| | Tuesday, May 30, 2006 - 09:24 am: |
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Hilarius,
with the benefit of hindsight already, it is a bit difficult to answer. I think the perfect outcome for a significant correction is to run to the sidelines with capital essentially intact and wade back in to enjoy the bargains once there is evidence of a turn from the bottom.
The fact that I stayed in this time using the normal stops does not mean I would not bail if I had the methodology to support the bail out decision with reasonable probability.
Most of us get caught in the twilight zone, having watched the initial fall and then deciding whether and then when to bail or ride it out or let the stops do the work etc or go on holidays and hope for the best.
To answer you question. I guess if I thought that there was some validity in the volatility chart I would be on high alert with the upward zero cross and would bail out somewhere between there and the +20 indication. If one ran this chart every day there would obviously be some sort of progressive indication that the risk was increasing. The likelyhood that the impending correction was going to be solid, the forecasts were 10-15% for the current correction and this would be a factor to consider.
I guess I need to do more testing of the concept which I have not done, this is just a first pass and I wanted to throw it up for discussion so the learned forum members can shoot holes in it if it isn't valid.
Regards Tony
(Message edited by tony_m on May 30, 2006)
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hilarius
Member
Username: hilarius
Post Number: 1832
Registered: 04-2004
Rating: N/A
Votes: 0
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| | Tuesday, May 30, 2006 - 10:58 am: |
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Hi Tony
The very last thing I would want to do is shoot holes in a good workable idea, which your signal seems to be
I understand your point in seeking various responses to test its validity
It would be interesting to refine use of the Chaikin signals to a point where one is confident to pull the selling trigger, without pulling it too often or much too soon
That is always the difficulty of driving with only a rear vision mirror
Perhaps there are other signals worth combining with Chaikin ... if Chaikin alone is not enough
In any case it seems to offer a possible basis for slightly tighter stops at the possible crest of the wave
I guess there are always regrets if one is stopped out too soon, but perhaps it is better than too late if the stop has been set on a rational basis
It is one almighty juggling act to get selling anywhere near right ... balancing fears of imminent losses against hopes of imminent or longer term gains
You seem to have found an interesting way of suspecting an imminent top
Do you think the Chaikin signal may have application to individual stocks as well as the market as a whole?
With Very Best Wishes
Hilarius
I come in peace to share my thoughts and to shine my candle light on possible long term opportunities
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tony_m
Member
Username: tony_m
Post Number: 668
Registered: 01-2003Rating: N/A
Votes: 0
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| | Tuesday, May 30, 2006 - 11:29 am: |
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Hilarius,
Yes it does seem to have some relevance with individual stocks where it frequently signals the blowoff trend developing usually prior to a retracement. However visual recognition of the blowoff is also an option.I am not sure how one would use this as part of an overall trading system with any exactitude.
I have extended the duration of the weekly chart to see what impact it would have had over a longer timeframe and the chart is below. I have highlighted what appear to be valid warnings in green and false signals in red.
Now this suggests that there is likely errors in using it as a straight exit signal but I would suggest that it might be a good signal for a tightening of portfolio stops. For example I believe that Ken uses an indice fall of 2.3% as an exit trigger, maybe with other confirming signal/s, I dont know exactly how Ken does it.
If the signal was followed by a significant downturn, say below the previous weekly low then it might provide one with enough confidence to bail immediately with most of the capital intact and get rid of that rabbit in the headlight problem that I suffer with and I suspect most others do as well. The 'will I - wont I' pull the trigger problem.
Regards Tony
(Message edited by tony_m on May 30, 2006)
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gohard
Member
Username: gohard
Post Number: 446
Registered: 05-2003
Rating: N/A
Votes: 0
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| | Tuesday, May 30, 2006 - 11:49 am: |
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Morning Tm,
I'm interested in the set-up for this indicator obliviously a different chart is in use to IC but the indicator is typical have included a snap shot to confirm the settings. Is this similar to yours.
There appears to be some merit in your observations,I would like to back check more stocks in my watch lists to see a comparison.
Thanks in advance G
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tony_m
Member
Username: tony_m
Post Number: 669
Registered: 01-2003Rating: N/A
Votes: 0
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| | Tuesday, May 30, 2006 - 12:20 pm: |
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Gohard,
I have recreated the same chart in IC with the only difference being that the scale is different. My vale of 20 is 0.2 on IC. Your setup is correct and the results are pretty similar.
I would be interested to get your feedback, this is just a punt at trying to solve the perennial problem of avoiding losses in corrections with some degree of predictability.
Regards Tony
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hilarius
Member
Username: hilarius
Post Number: 1833
Registered: 04-2004
Rating: N/A
Votes: 0
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| | Tuesday, May 30, 2006 - 12:34 pm: |
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Tony
It's looking good to me .. enough valid triggers to counteract the non-valid
Maybe a Chaikin thread would be good with people invited to post their Chaikin supported sell signals (along with any other confirming indicators they may like to add)
Congratulations on this interesting discovery
Testing it in real time on paper and then if justified in real life could prove useful
Hilarius
I come in peace to share my thoughts and to shine my candle light on possible long term opportunities
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fibonacci
Member
Username: fibonacci
Post Number: 148
Registered: 10-2003
Rating: N/A
Votes: 0
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| | Tuesday, May 30, 2006 - 01:57 pm: |
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Fellas,
Been following with interest.
Some interesting comments under "interpretation."
http://www.paritech.com.au/education/technical/indicators/volatility/volatility1 .asp
John
You've got to
know when to hold 'em
know when to fold 'em.
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tony_m
Member
Username: tony_m
Post Number: 670
Registered: 01-2003Rating: N/A
Votes: 0
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| | Tuesday, May 30, 2006 - 02:16 pm: |
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John,
Thanks for the reference, I dont have any practical exposure to volatility indicators so I cant be too dogmatic about whether this is a useful tool or not.
From a brief look at more rangy trends I can see it has limited use, at least in the context of what I started out to do, to just look at indices like the XAO to see if it is possible to get a jump on impending change. Portfolio traders like me can be seriously singed in a downturn and any help has the potential to seriously alleviate drawdowns.
The sort of implementation as a market predictor which I was looking for seems to be somewhat more obvious within the framework of stable trending price action. In this context maybe the indicator has some use with individual stocks as well.
Pity I didn't twig to this a few weeks ago, there was a very obvious signal evolving in the weeks prior to the start of the correction.
Tony
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hilarius
Member
Username: hilarius
Post Number: 1834
Registered: 04-2004
Rating: N/A
Votes: 0
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| | Tuesday, May 30, 2006 - 04:18 pm: |
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Good Afternoon
Bloomberg publishes a Beta Factor for a number of Australian Stocks
Example :-
BHP = 1.574
http://www.bloomberg.com/apps/quote?ticker=BHP:AU
I've e-mailed Bloomberg asking for clarification of their calculation method, and choice of sample ... not sure whether I will hear back
Stocks with a Beta greater than 1 are more volatile than the sample of stocks against which they are measured
Stocks with a Beta below 1 are less volatile than the sample
A high Beta indicates the need for wider stops if one wishes to avoid being stopped out by price swings that are normal for the stock
The problem is that every major correction for an index or a stock starts off looking like a normal swing (unless it has a catastrophic price collapse when it may be too late to take preventive action and this is where the GSLO hopefully is an important safeguard for those who use them)
So a means is needed to determine when market noise is normal and when it is the start of something abnormal
The Chaikin indicator looks interesting and I have another statistical tool which I use for filtering out normal price swings ... problem is that it is a heavy maintenance tool, requiring at this stage manual updating of each stock
I did discuss implementing it with Colin a year or more ago here in the Forum, and I will post an example later to see if there is any interest
With Best Wishes
Hilarius
PS I will post this message and an example chart later on the Beta Factor thread which I started in Indicators
I come in peace to share my thoughts and to shine my candle light on possible long term opportunities
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