Trading the Volatility Bands for Amibroker (AFL)
You must have come across trading strategies based on Daily pivot and variations like the camarilla pivots.
Here is a strategy to trade on the statistical levels of volatility. The volatility values for a particular day are calculated. Based on these volatility values bands are calculated for different standard deviations 0.25, 0.5, 1.0, 1.28, 1.5, 2.0, 2.5
This is based on the assumption that volatility reverts to the mean and the price also seeks a equilibrium value. As per statistics the probability of the price being contained within a certain standard deviation band is as follow.
1.00 – 68%
1.28 – 80%
1.50 – 88%
2.00 – 95%
You will observe that the prices tend to reverse at the extremes of these bands. The probability of a price reversal at the one standard deviation band is 68% and the probability of reversal at the 1.28 bands is 80% and so on. These probability bands provide a good method for intraday traders.
One can go long when the price crosses a particular band keeping the band value itself as a stop loss. When the price crosses the next band raise the stop loss thereby locking the profit. When the price stalls at a particular band unable to cross it is time to close your position and be ready to go on the reverse trade.
This strategy based on the volatility bands provides good high probability trades.
Submitted by vishyvishy almost 7 years ago
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