PollyM
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SESSION 33
On volatility.
Volatility comes in several guises. To take the two most readily identifiable, you have the natural randomicity of price movement, and the other being a result of suppression, whether it be intentional or otherwise.
Natural volatility or randomicity is the exuberant and spontaneous action of market movement. It works within flexible natural channels and helps keep the action fresh and unpredictable. Each moment is a new beginning so to speak, never seen before, and never to be repeated in exactly the same way. In nature, this is similar to a growing plant or animal. You know it is of a particular kind, but you simply cannot predict the direction(s) in which it will grow. There are seemingly infinite factors at play which are simply beyond exact measure.
Volatility resulting from suppression can be a far less enjoyable event. In nature, such situations can be likened to an influential body which has for too long suppressed the will of its members. Eventually, a point is reached where the pressure is too great for the influential body to bear and a sudden release of energy is experienced, causing the influential body to disintegrate, and chaos to ensue.
A robust trading method should be able to cope with both situations, ‘picking up’ clues early enough to see that you are positioned to benefit from the changes or at least move you into a neutral position.
Both of the above kinds of volatility exist at all wavelengths, but vary in character and relative magnitude as you go up and down the scale. Natural volatility decreases as you increase the wavelength. At tick level, where each new price is being ‘born’, it looks very random, but gradually certain patterns begin to form and the volatility factor becomes smoother and smoother, particularly in high volume markets such as foreign exchanges and index-related products.
With volatility resulting from suppression, this is can be an all-of-a-sudden re-alignment occurring with little notice, as in the case of the 1987 crash. The severity of re-alignment is proportional to the degree of distortion created by the suppression, which is not always possible to know until some time later when everything resolves itself. In some cases, if a market’s natural pathways are exceptionally suppressed (or overstretched depending on how you look at it), then the release of pressure can lead to price whiplashing past its natural level by a similar degree, and repeating this sequence over a prolonged period of time until eventually all the energy is re-distributed and it settles at its natural level.
When starting out in trading, it is a good idea to see how you first get on trading the daily timeframe. Once you establish a profitable method in the daily timeframe you can then move onto the quicker timeframes of day trading. As outlined above, the smaller and smaller the timeframes get, the greater the factor of natural volatility becomes. This will have the knock-on effect of reducing your level of profitability with any given trading system, including the harmony trading method. If you choose to move into day trading you will therefore need to develop ways in which you can keep tipping the balance back in your favour, for each change in timeframe.
Tomorrow I will move onto section three, trading the live game.
Until then …
[Running total of set-up cost = £0.00. See SESSION 13 re spending a penny.]
On volatility.
Volatility comes in several guises. To take the two most readily identifiable, you have the natural randomicity of price movement, and the other being a result of suppression, whether it be intentional or otherwise.
Natural volatility or randomicity is the exuberant and spontaneous action of market movement. It works within flexible natural channels and helps keep the action fresh and unpredictable. Each moment is a new beginning so to speak, never seen before, and never to be repeated in exactly the same way. In nature, this is similar to a growing plant or animal. You know it is of a particular kind, but you simply cannot predict the direction(s) in which it will grow. There are seemingly infinite factors at play which are simply beyond exact measure.
Volatility resulting from suppression can be a far less enjoyable event. In nature, such situations can be likened to an influential body which has for too long suppressed the will of its members. Eventually, a point is reached where the pressure is too great for the influential body to bear and a sudden release of energy is experienced, causing the influential body to disintegrate, and chaos to ensue.
A robust trading method should be able to cope with both situations, ‘picking up’ clues early enough to see that you are positioned to benefit from the changes or at least move you into a neutral position.
Both of the above kinds of volatility exist at all wavelengths, but vary in character and relative magnitude as you go up and down the scale. Natural volatility decreases as you increase the wavelength. At tick level, where each new price is being ‘born’, it looks very random, but gradually certain patterns begin to form and the volatility factor becomes smoother and smoother, particularly in high volume markets such as foreign exchanges and index-related products.
With volatility resulting from suppression, this is can be an all-of-a-sudden re-alignment occurring with little notice, as in the case of the 1987 crash. The severity of re-alignment is proportional to the degree of distortion created by the suppression, which is not always possible to know until some time later when everything resolves itself. In some cases, if a market’s natural pathways are exceptionally suppressed (or overstretched depending on how you look at it), then the release of pressure can lead to price whiplashing past its natural level by a similar degree, and repeating this sequence over a prolonged period of time until eventually all the energy is re-distributed and it settles at its natural level.
When starting out in trading, it is a good idea to see how you first get on trading the daily timeframe. Once you establish a profitable method in the daily timeframe you can then move onto the quicker timeframes of day trading. As outlined above, the smaller and smaller the timeframes get, the greater the factor of natural volatility becomes. This will have the knock-on effect of reducing your level of profitability with any given trading system, including the harmony trading method. If you choose to move into day trading you will therefore need to develop ways in which you can keep tipping the balance back in your favour, for each change in timeframe.
Tomorrow I will move onto section three, trading the live game.
Until then …
[Running total of set-up cost = £0.00. See SESSION 13 re spending a penny.]