Using Implied Volatility And Volume by Scott Castleman
Construct a trend-following system that adjusts to
current market conditions.
Traditionally, technicians have relied
on historical prices to analyze the market.
They have created many different
indicators to predict the direction of
prices by basing their calculations on
past data. However, these indicators may fail to work
prospectively when markets do not repeat their historical
patterns. Thus, using these indicators to forecast
market direction is like trying to drive a car by
looking in the rearview mirror. Any change in the
road ahead could lead to disaster.
When we are searching for ways to forecast the
direction of the market, it is essential to characterize
the market with current information. Two such ways
of describing the market are with implied volatility
and volume. Using implied volatility and volume as
parameters, you should be able to construct a profitable
trend-following system by adjusting the number
of days referenced in a simple DonchianƯ-style
breakout system. This allows the system to adjust
itself to reflect current market conditions.