V.16:7 (344-348): A Volatility Trade In Gold by David S. Landry

V.16:7 (344-348): A Volatility Trade In Gold by David S. Landry
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A Volatility Trade In Gold by David S. Landry, CTA

Large moves often follow low-volatility environments. Here's one method of combining volatility indicators and pattern recognition along with trend-following methods to capture a breakout in the 1997 gold futures market.

A simple review of a market chart will illustrate that markets trade in periods of lackluster sideways price action and then abruptly adjust to new conditions by trending to another price level. The goal of many traders is to trade these short-term trends profitably. Technical analysis can aid you in identifying potential trades based on the concept of the market moving from trading ranges to trends. To demonstrate, I'll walk you through a trade in the gold market based on a set of technical indicators.

First, let me define the formulas I used for my analysis (see sidebar "Formulas" for the calculations). Having set up my indicators, letís walk through the steps for making a trade.

The first step is tracking volatility. To measure volatility, I used four-, six- and 10-day historical volatility indicators inspired by the volatility work of Larry Connors. I added two additional indicators to the historical volatility indicators. I ran an average of the three by adding each of the four-, six- and 10- day historical indicators together, dividing by 3, then calculating a 12-day exponential moving average (EMA) of that result.

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