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..Over the Next Hour We Will Touch On. Volatility Reflexivity Volatility Reflexivity & Market Psychology Indicator Failure | Information Failure Market Understanding Failure Four Types of Volatility Defined Volatility Defined Market Volatility | Price Volatility | Period-Mean Volatility | Probability Volatility Probability Volatility Probability Volatility Volatility Expansion = Trending Volatility Compression = Lateral Trading Mean Reversion Trading Mean Reversion Two Types of Mean Reversion Identifying Opportunity .
may have been bad from the start..To Unlock the Mystery ● We must first be willing to think critically (with an open mind) about why what we’ve been told is reliable ● We must check the math.. We Must Then Be Willing to Deconstruct Everything We Know. Is truly reliable. ● We must not accept vague terms like “overbought and oversold..” ● We must be willing to consider the possibility that 95% of the information.. ● We must be willing to put in the time ● We must have a thick skin ● We must be willing to consider the fact that the information believed to be true. We Must Be Willing to be Patient While Putting the Pieces Back Together.. media. . analysts and economists present is wrong.
First Piece of the Puzzle to Unlock What is Volatility Reflexivity? .
• "Volatility" is really opportunity and can be spotted through generalizations. and professionals creates volatility... media. Volatility Reflexivity .• The imperfect understanding of markets and trading by individuals.
outcomes are liable to diverge from people’s expectations.George Soros and Reflexivity • "Human understanding is often incoherent and always incomplete." . And the two are not identical." • "Events that have thinking participants cannot be understood without taking that divergence into account." • "Therefore." • "People base their actions not on reality but on their view of the world.
Influenced by Karl Popper Popper's Model of Analytical Science Initial Conditions Generalizations Final Conditions .
Initial Conditions The Problem with Popper's Model The Theory of Generalizations Confirm Outcome Generalization must be TRUE .
. 2. Technicians use indicators such as the relative strength index. the stochastic oscillator or the money flow index to identify securities that are becoming overbought.com Defines Overbought as. An overbought security is the opposite of one that is oversold. An asset that has experienced sharp upward movements over a very short period of time is often deemed to be overbought.Overbought and Oversold Investopeida. Determining the degree in which an asset is overbought is very subjective and can differ between investors.. 1.1 .
Influenced by Karl Popper Popper's Model of Analytical Science For Example.. Market Rally Initial Conditions Stochastics Overbought Generalizations Selloff Pending Final Conditions Reversal What if the Final Conditions are not met though? ..
we would see the GENERALIZATION was the problem from the start... When Trying to Figure Out What Went Wrong? • • • When we depend on generalizations.. Otherwise....... So we look at everything else that could have been the problem. Except the problem itself.... we can never question the generalization that was the vehicle linking our expectations to the outcome. .Why Generalizations are so Harmful! Initial Conditions AKA Expectations Must Have Vehicle "Generalization" To Link Our Expectations to the Outcome. The Generalization.
Move in a logical.. the currency must be overbought.. Fact Fact Fact = Outcome We commonly believe information. For example. technical events.... trading opportunity. etc. a reversal is pending... trends.How We Most Often Perceive Markets and Trading. and thus. or the beginning of a trend... sequential flow.. "When Stochastics trade above 80." But this type of thinking fails to consider how higher prices might change some traders opinion to: Higher prices mean the currency is breaking out to a new range. .
" The Alchemy of Finance | George Soros | Page 41 .Theory of Reflexivity Expectations Fact = Outcome Understanding Perceptions Fact "The actual course of events is likely to differ from the participants’ expectations and the divergence can be taken as an indication of the participants’ bias.
. .. Example: Higher prices may lead participants to perceive a "breakout" and thus..Imperfect Thinking (Perceptions) of Market Participants How Participants Are Influenced By and also Impact Markets Cognitive Function • • Participants Perceptions Are Dependent on the Situation Example: One may not consider taking a position long. unless an upward trend were in place. drives prices even higher. take positions long. in-turn. Passive Function • • The situation is influenced by the participants perceptions.... Which.
Volatility Reflexivity We must take another step beyond Soros' Theory of Reflexivity. balanced. .. to remain clear.. and profitable during stressful short-term trading.
Step 1 Unlinking Our Expectations from the Outcome • We must cognizant of our own thinking and emotions. we must ask ourselves if our perception of reality has become skewed. If we have. or biased.... If we find we have linked our expectations to an outcome. based on the fact that we are expectant of a particular outcome... constantly asking ourselves if we have possibly linked our expectations to the outcome. we must identify the Generalization (the vehicle). • • . which may be causing the problem..
or perceptions? Step back from the situation and attempt to "weight" the situation in-terms of "expectations aligned".. • • . or perceptions influencing price? Ask ourselves if perceptions are being influenced by facts. or "uncertainty persists" within markets..Step 2 Separate Facts from Perceptions of Broader Market. • Ask ourselves if price is influencing perceptions.
. We must ask why we have linked our perception to the outcome? We must then ask what other possible information we might be (consciously or unconsciously) ignoring... If we have linked a perception (expectation) to an outcome. to keep our expectations cheerfully linked to the outcome..Step 3 Be Fully Prepared to Change Our Minds. and we have identified such... Be prepared to close our position (winner or loser) should the facts | perceptions show our expectant outcome is likely flawed... • • • . Should the Situation Warrant Such..
or are Perceptions Influencing Price? Is There Really Opportunity or Risk Right Now? Are Perceptions Biased or Warranted? . News. Politics and Technicals Analyze Perceptions Both Our Own and That of Other Participants Analyze Expectations Ask Where Facts and Perceptions May be Linking Expectations to an Outcome Is Price Influencing Perceptions.Analyze Facts Fundamentals.
retail traders are reacting to price movements... Meaning.Perceptions Versus Price Perceptions Influencing Price • • Can be both retail and institutions Most often though. technical signals are a derivative of price influencing perceptions... . and are taking action Price Influencing Perceptions • • Can be both retail and institutions Most often though. or potential future value gain or loss. perceptions influencing price are institutions seeing risk.
defined. Volatility is a generalized term covering erratic price action. volatility is probability.Another Piece of the Puzzle What is Volatility? • As currently discussed.. • . and thought of by media. traders... and/or fear within markets.. and educators... There are really four types of volatility.. • Most important thought. risk within returns..
Market Volatility 2.Volatility for Active Traders The four types of volatility that affect common trading and markets are: 1. Probability Volatility Volatility is Not an "all-encompassing" word! . Mean-Period Volatility 4. Price Volatility 3.
the label is required to separate "price action" from the other three volatility descriptions. . Since its introduction in 1993.Market Volatility "The CBOE Volatility Index® (VIX®) is a key measure of market expectations of near-term volatility conveyed by S&P 500 stock index option prices.." Price Volatility Price volatility is a both a cause of. and derivative of market volatility. probability volatility and mean-period volatility. VIX has been considered by many to be the world's premier barometer of investor sentiment and market volatility.. While price volatility is really nothing more than an extra description of the total low-tohigh range of prices in any given period measured.
In addition. . Probability Volatility • • • Total probability of potential Price Volatility. the shorter the period measured..Mean-Period Volatility Mean period volatility is simply the paradigm where shorterterm distributions will likely show greater volatility than that of their longer-term counterparts.. Mean-Period Volatility at any given moment. Influences and influenced by Market Volatility Significant "real time" tool in helping us identify opportunity or risk within markets and trading. the greater the volatility of the same mean measured. For example: A 50-period mean on 15minute chart will show greater volatility than a 50-period mean on a 4-hour chart.
Probability Volatility • Expansion and Compression of Standard Deviations Is a leading Indicator Specifically informs us of "total possible probability" at any given moment... • • .
or Lateral Trading is in Effect. .Standard Deviations • • • Measurement of Probability Expand and Compress Identify When Trending is About to Begin...
Standard Deviations • • • Shape of distribution does not matter.. Probability remains intact.. ... Distribution (just like the mean) is not static. because the distribution moves AND standard deviations (volatility bands) expand and contract. it is dynamic like prices and time. rather...
Fatal Flaw of Assuming Static Distribution.. ..
and What the Occurrence Means! .Why Standard Deviations Expand and Compress.
..Identifying Trending Versus Lateral Trading Action. .
To Trade With the Trend or Mean Reversion? .
• Price action mean reversion occurs when random volatility strikes after a news announcement.. Volatility Compression Mean Reversion ... • "Reload Mean Reversion" Occurs when Institutions Allow Prices to Fade Back to Mean in Order to Obtain a Better Fill Price Action Reload Reversion Three Types of Mean Reversion • Uncertainty.. or Fair Value Mean Reversion Occurs in Lateral Markets and can be Spotted Through Volatility Compressing.
Mean Reversion Opportunity .
Probability Volatility Compression Equals Mean Reversion Opportunity! .
Don't Fear Lateral "Chop" Anymore! It's Really Just Volatility Compressing and is Filled with Mean Reversion Opportunity! .
Thank You! Volatility Reflexivity & Mean Reversion Mark Whistler .
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