Volatility-Based T Hi La L I Technical Analysis: Strategies For Trading The Invisble Kirk Northington

Volatility-Based
T h i l Analysis
Technical A l i :
Strategies for Trading the Invisble
Kirk Northington
With Companion Website

http://www.tradingtheinvisible.com
tradingtheinvisible.com
metaswing.com
Kirk Northington
BIO
The author of Volatility
Volatility-Based
Based Technical Analysis: Strategies for Trading
the Invisible. Wiley Trading Series, John Wiley & Sons Publishers. ISBN:
978-0-470-38754-2.
The owner of Northington

g Trading,
g, LLC,, and the creator of MetaSwing,
g, a
MetaStock and TradeStation Add-On. He trades his own money, and uses
MetaSwing technical analysis methods exclusively.
Kirk Northington is a technical analyst. He is an associate member of the

Market Technicians Association, through which he is participating in the
Chartered Market Technician (CMT) Program.
Kirk has a B.S. degree from Nicholls State University, in Thibodaux,

L i i
Louisiana. H
He hhas extensive
i experience
i iin controll system engineering,
i i
software engineering, and project management. Kirk, his wife Faith, and
his two sons live in Charlotte, North Carolina.
kirk@metaswing.com
kirk@metaswing com or (910) 789
789-0673
0673
Northington Trading Page 2
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The Companion Website: tradingtheinvisible.com
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Goal of Volatility-Based Technical Analysis
Goal:
Identify
yap point where,, mathematically
y
speaking, price should not be, at that
point in time;;
p
i.e.,, find the true inefficiencies.
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Mantra of Volatility-Based Technical Analysis
Mantra:
Money
y is made at the Extremes
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Money is made at the Extremes
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How is this possible?
Volatility
y Measurement:
Identifies Extremes
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Can I understand volatility measurement?
Yes
Volatility Measurement with:
Calculus
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VBTA = New Concepts and Capabilitis for TA
This Presentation:
Will pick one concept and capability and

solve for it:
Trend Compensation
We will also view volatility-based support and resistance.
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Why is Volatility Measurement Important?
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Why?
• Equity
q y Options
p Trading
g
• VaR – Value at Risk modeling

• Portfolio Managment
• Risk Management
• Program Trading
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Brain Power page 5
Quatitative mathematics focuses heavily on volatility measurement

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Horse Power
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Why is Volatility
Measurement
Important?
Horse Power
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Brain Power page 5
Quatitative mathematics focuses heavily on volatility measurement

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Horse Power
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Opportunities
Take the Offensive
• Redraw the Playing Field

• Simple Volatility Measurement
• Avoid Systemic Risk
• Hidden Momentum
• True Overbought and Oversold
• Exit on Cue
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Preparing to Use VBTA
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Working with Volatility Measurement
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What is Volatility?
Concept . . . Not a Specific Measurement
• “In truth volatility is more of a concept applied to whatever the

task at hand needs it to be. So conceptually volatility as it
applies to a tradable instrument is just a measurement of an
instrument’s price, in terms of rise or fall, within a given time
frame.”
• Used to project an extreme that might be reached, within a

reasonable probability
• Most commonly expressed with Standard Deviation
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What is Volatility?
Historical and Implied
• “Historical Volatility (also referred to as Statistical Volatility) is

a measure of movement within a given period of time.
Historical volatility is normally measured using forms of
standard deviation and is expressed in terms of percent.”
• “Implied
Implied Volatility: A measure of possible, or ‘expected’
expected
movement of the underlying stock’s price, as projected
forward through time, expressed as a percentage. It is created
by any of many options pricing models. These pricing models
utilize all known options trading factors, in addition to the
actual current trading price of the option’s premium.”
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Option Pricing
Historical Implied
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Volatility Unmasked
Basic Forms of Volatility Measurement
• Standard Deviation
• Average True Range
• Percentage
• Mean (or Average)
• Linear Regression
g
• Standard Error
• R Squared
• Variance
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Volatility Measurement is Simple as 1 - 2 - 3
Standard Deviation (20)
1. Difference between Close and

moving average
2. Square it (Key Step)
3. Add the most recent 20 of these,

and calculate square root
root.
Stdev(C, 20)
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Average True Range
It is the greatest of:
• The distance from today’s

y high
g to today’s
y low.
• The distance from yesterday’s close to today’s high.
• The distance from yesterday’s close to today’s low.
ATR(C, 14)
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Linear Regression
Most Efficient – Least Squares
1. Difference between price and

theoretical
h i l line,
li then
h square it.
i
2. Add up all the squared values
3. Redraw the line so that the sum

of the squared values is lower.
((lather,, rince,, repeat)
p )
LinearReg(C, 20)
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Predictive Qualities
• Percentage
• Standard Error
• R Squared
• V i
Variance
Forward Predictive Value = 2 to 5 Periods
• Are Fractal and therfore Chart Periodicity independent
• Dependent on lack of conflicting / overriding fundamental news; as is all TA
• Amplified by Trend
• Design specific components for specific purposes
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Specific Purpose
• Percentage
• Standard Error
• R Squared
• V i
Variance
T
Trend
d Compensated
C t d
O S ld / Overbought
OverSold O b ht Detection
D t ti
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Northington RSIV
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Northington RSIV
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Northington RSIV
{ py g
{Copyright Kirk Northington,
g , Northington
g Trading,
g, LLC.
All rights reserved}
{User Inputs}
pds1:= Input("Lookback", 2, 1000, 30);
pds2:= Input("Linear Regression Periods", 2, 1000, 40);
pds3:= Input("ATR Periods", 2, 1000, 7);
Upper:= Input("Upper
(" Threshold",
h h ld" 50
50, 99
99, 70)
70);
Lower:= Input("Lower Threshold", 1, 59, 30);
{Express the prevailing trend}

x1:= (C - LinearReg(C, pds2)); Trend Compensation
{Calculate the RSIV indicator}
x2:= If(x1 > Ref(x1, -1), 1, 0);
x3:= If(x1 > Ref(x1, -1), x1 - Ref(x1, -1), 0);
x4:= If(x1 < Ref(x1, -1), 1, 0);
x5:= If(x1 < Ref(x1, -1), Ref(x1, -1) - x1, 0);
x6:= Sum(x3, pds1) * Sum(x2, pds1);
x7:= (Sum(x5, pds1) * Sum(x4, pds1)) + .00001;
x8:= 100-(100/(1+(x6/x7)));
{Volatility threshold calculation}

x9:= (ATR(pds3) / Mov(C, pds3, E)) * 100;
x10:= x9 - LinRegSlope(x9, pds2);
{Plot the indicator}

Upper + x10;
Upper;
x8;
{Fml("Northington RSIV Fast");}
Lower;
Lower - x10;
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Example
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Required Capabilities
Capabilities of a VBTA
Trading System
• Oversold and Overbought

• Trend Detection
• Broad Market Integration
• S
Support t and
d Resistance
R i t
• Historical Volatility
• Implied Volatility
• Multi-Timeframe Verification
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The Framework
Capabilities Components TTI ATR Extreme TTI Fabric SD TTI Fabric Ratio LR-SD TTI RSIV-1
Application TTI StochEx TTI Fabric LG TTI Trend Strength TTI Composite
1 Oversold / OverBought
Trending x x x x
Non-Trending x x x x x x
TTI Trend Entry x x
2 Trend Detection
Capabilities of a Trending x x
Non-Trending x
VBTA Trading System TTI Trend Entry x x
3 Broad Market Integration

T di
Trending
• Oversold and Overbought Non-Trending
• Trend Detection TTI Trend Entry
• Broad Market Integration 4 Support and Resistance

• Support and Resistance Trending
Non-Trending
• Historical Volatility TTI Trend Entry
• Implied Volatility
5 Historical Volatility
• Multi-Timeframe Verification Trending x x x x x x
Non-Trending x x x x x x x
TTI Trend Entry x x x x
6 Implied Volatility
Trending
Non-Trending
TTI Trend Entry
7 Multi Time Frame Verification

Trending x x x
Non-Trending x x x x x x
TTI Trend Entry x
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Volatility-Based
Trading Bands (N Bands)
N Bands are calculation of

price volatility
volatility.
They represent an extreme

level of support and resistance
on a chart.
h t
When price approaches the N

Bands a reversal,
reversal or at least a
pause is likely.
Higher significance when

volatility
l tilit iis hi
higher.
h
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Volatility-Based
Support and Resistance (S/R) Lines
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Volatility-Based
Support and Resistance (S/R) Lines
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Other Examples
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Other Examples
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Other Examples
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Other Examples
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Other Examples
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Other Examples
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Live Charts
Live Charts of Your Choice
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Volatility-Based Technical Analysis
Kirk Northington
www.tradingtheinvisible.com
www.metaswing.com
kirk@metaswing.com or (910) 789-0673
metaswing.com
Volatility-Based
T h i l Analysis
Technical A l i :
Strategies for Trading the Invisble
Kirk Northington
With Companion Website

http://www.tradingtheinvisible.com
metaswing.com

Volatility-Based T Hi La L I Technical Analysis: Strategies For Trading The Invisble Kirk Northington

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Volatility-Based T Hi La L I Technical Analysis: Strategies For Trading The Invisble Kirk Northington

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Volatility-Based

With Companion Website

 The owner of Northington

 Kirk Northington is a technical analyst. He is an associate member of the

 Kirk has a B.S. degree from Nicholls State University, in Thibodaux,

i.e.,, find the true inefficiencies.

Will pick one concept and capability and

We will also view volatility-based support and resistance.

• VaR – Value at Risk modeling

Brain Power page 5

Quatitative mathematics focuses heavily on volatility measurement

Brain Power page 5

Quatitative mathematics focuses heavily on volatility measurement

Take the Offensive

• Redraw the Playing Field

Concept . . . Not a Specific Measurement

• “In truth volatility is more of a concept applied to whatever the

• Used to project an extreme that might be reached, within a

• Most commonly expressed with Standard Deviation

Historical and Implied

• “Historical Volatility (also referred to as Statistical Volatility) is

Basic Forms of Volatility Measurement

Standard Deviation (20)

1. Difference between Close and

2. Square it (Key Step)

3. Add the most recent 20 of these,

It is the greatest of:

• The distance from today’s

Most Efficient – Least Squares

1. Difference between price and

2. Add up all the squared values

3. Redraw the line so that the sum

Basic Forms of Volatility Measurement

Forward Predictive Value = 2 to 5 Periods

• Are Fractal and therfore Chart Periodicity independent

• Dependent on lack of conflicting / overriding fundamental news; as is all TA

• Design specific components for specific purposes

Basic Forms of Volatility Measurement

{Express the prevailing trend}

{Volatility threshold calculation}

{Plot the indicator}

• Oversold and Overbought

3 Broad Market Integration

• Broad Market Integration 4 Support and Resistance

7 Multi Time Frame Verification

N Bands are calculation of

They represent an extreme

When price approaches the N

Higher significance when

Live Charts of Your Choice

 kirk@metaswing.com or (910) 789-0673

With Companion Website

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The owner of Northington

Kirk Northington is a technical analyst. He is an associate member of the

Kirk has a B.S. degree from Nicholls State University, in Thibodaux,

kirk@metaswing.com or (910) 789-0673