V.7:7 (224-226): Volatility analysis and simulation used in tactical trading Part 2 by Peter Eliason

Volatility analysis and simulation used in tactical trading Part 2 by Peter Eliason

The tactical trading algorithm, as explained in the March 1989 issue of Stocks & Commodities, is made up of two components: the manipulation of a numerical series to determine the number of shares to buy or sell (normally a small portion of the shares owned), and a point spread that determines the price at which the buy or sell should take place.

Two limit orders, one above and one below the last transaction's price, await the price movement of the stock or commodity and the eventual filling of an order. With the order filled, the remaining limit order is canceled and two new limit orders are developed. This process is repeated over and over until a cycle is completed.

Volatility

Each stock or commodity has a volatility, or trading range, over time. The measurement of volatility tells us what's hot and what's not.

Volatility is calculated as high less low divided by close over time. A high of 10, a low of 9 1/2, and a close of 10 as reported by The Wall Street Journal would produce a 5% daily volatility. A high of 10, a low of 9, and a close of 10 as reported by Barron's would produce a 10% weekly volatility.