Profiting From TradingMarkets: How To Use Kevin Haggerty’s Volatility Bands

  • September 8, 2004
  • Brice Wightman




Last time, we talked
about using floor trader’s pivots in your trading. This week, I’ve
got more important levels you should be watching: Kevin Haggerty’s volatility
band levels.

The first question people ask about these bands is: “are they like Bollinger
Bands?” The answer is no, not at all.  Volatility bands are based on the
implied volatility of the puts and calls of the indices and are static — good
for one day.

We use four standard deviations on each side of the market — above and below.
Statistically speaking, one standard deviation encompasses 68% of the data,
which means that if you are hitting a 1.0 vol band, you have a 68% chance of a
market reversal at that level. The remaining percentages are: 1.28 band – 80%;
1.50 band – 87%;  2.0 band – 95%.

In
TradersWire
each day, we post the volatility band levels.

These are the numbers from Tuesday September 7:

Volatility Bands

Here are today’s

volatility band levels for the Nasdaq 100, S&P 500 and PHLX Semiconductor
Index:

S&P
500 Index 

Upper

 Lower

 1.0 

1121.5

1105.7

 1.28

1123.7

1103.5

 1.5

1125.4

1101.8

    2.0 

1129.3

1097.8
Nasdaq
100 Index		    
 

1.0 

 1386.6

1357.0

   1.28

 1390.7

1352.8

 1.5

 1394.0

1349.6

    2.0 

 1401.4

1342.2

Semiconductor Index		    
1.0

364.0

 351.6
1.28

365.7

 349.9
1.5 367.0 348.5
2.0 370.1 345.5

Reversals happen at or near these levels. Let’s look at the S&P cash in the
chart below:

You can see that the market traded up early to
the 1.0 volatility band before backing off. You had a 68% chance of a reversal
at this level. Later in the day, the market traded up to the 1.28 band before
reversing; here, you had an 80% chance of a market reversal.

This action is fairly common; we see reversals
like this take place at volatility band levels frequently. And, like pivots, you
don’t have to trade futures to benefit from this. You can time your stock trades
using the volatility bands. Just make sure that the stock you are trading is
either in the S&P 500 or moves substantially with it.

Using volatility bands gives you extra confidence
in your trading.
You’ll know in advance the levels at which reversals are likely.

If you need any help with using volatility bands, please
feel free to e-mail me at brice@tradingmarkets.com.

Brice Wightman

 

 

 

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