Combining Volatility and Directional Strategies to Trade ETFs

Last week in the Daily Battle Plan, I twice mentioned that based upon the historical volatility readings I use, a large market move was likely to occur within a few days. Yesterday that move played itself out as the overall market dropped over 2% for the day.

In yesterday’s Trading Lesson of the Day, I mentioned that if the 10-day historical volatility of a security is 1/2 or less than its 100-day historical volatility, a large move will likely occur. I originally published this research in 1995 and it’s still valid today as you just saw.

Another way I look at volatility is using the 6-day historical volatility versus the 100-day. If the 6-day is 35% or less of the 100-day (it was under 15% late last week) then it’s saying that a large move is nearing.

As I mentioned last week, volatility applied like this does not predict direction. Ideally you want to combine your directional strategies with these volatility readings to help you identify potentially large moves. For example, if you have a number of ETFs well above their 200-day moving averages which have pulled back to a low 2 -period RSI reading (meaning the directional edge is likely higher) you better pinpoint the larger moves by overlaying the historical volatility readings to them.

Historical volatility is a great tool. It can be utilized in many ways and as we move forward in the Daily Battle Plan, I’ll teach you more ways to apply it to your trading.

Larry Connors will be conducting a presentation on The TradingMarkets Swing Trading College beginning in the Spring. If you’d like to attend a free online presentation, please call 1-888-484-8220 ext. 1 or click here to register today.

Larry Connors is CEO and Founder of and Connors Research.