Classification by trend and volatility - Aussie Stock Forums

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  1. #1

    Default Classification by trend and volatility


    Different market conditions require different indicators. For example: trend-following

    indicators work well in trending times when volatility is low.

    According to 'Curtis Faith' book 'Way of the Turtle' you can classify a time series in two

    1. The strength of the trend
    2. The volatility

    This gives you four market scenarios which require different indicators.
    1. WEAK trend and LOW volatility
    2. WEAK trend and HIGH volatility
    3. STRONG trend and LOW volatility
    4. STRONG trend and HIGH volatility

    I am trying to implement this in a system. The idea is to look at the last 20 days and

    measure trend and volatility during this period and from that classify the time series. The classification then determines which indicators to use.

    I measure the strength of the trend by taking the slope of the linear regression line. After

    that I divide the slope value by the price of the first day of the period to get a

    percentual value of the trend. This also normalizes the data.

    I can calculate the volatility for the past 20 days. Volatility is a already a normalized

    measure so I don't need to normalize the data.

    My question is if this is enough to be able to classify different equities from different

    markets. I mean indices or currencies will always be classified with a LOW volatility.
    Maybe I should classify by a relative volatility, that is measuring the relation between the

    short-time volatility and the long-time volatility?

    Does anybody have any suggestions of a good way to measure trend and volatility which works

    across different markets?

    With kind regards,

    Tambourine Man

  2. #2

    Default Re: Classification by trend and volatility

    I'm finding volatility a bit of a tough one to work out at the moment.

    The problem I have is that some moves are inherently volatile. Any sort of breakout move for example will often result in extreme volatility in the short term, and that doesn't seem to correlate in any way to the days leading up to the breakout. So I guess there is no baseline for short term volatility to be measured against at the start of a trend. If the trend continues, then volatility can be measured against that previously in the trend, but I find the initial few days at least to be quite random and more of a nuicance than anything where a breakout type move occurs.

    Not sure that helps you in any way though...

  3. #3

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    Default Re: Classification by trend and volatility

    I'm starting to use bollinger bands to help me identify volatility... the closer the price is getting to the bands on either side, the more volatile. Not the best indicator however, any one else use the bands in this way?

  4. #4

    Default Re: Classification by trend and volatility

    Hi Naked Shorts,
    Bollinger Bands is one of my favourite indicators - using a plot of Standard Deviation can be helpful - it amplifies the Bollinger band action.

    Bollinger Bands can be used as a stand alone indicator - if you know how to use them

    They also tell you what type of indicator you should be using - if you use other indicators

    For basic Bollinger Band use - Bollinger on Bollinger Bands is a useful book to read to get the basics
    If you want to delve deeper try reading Philippe Cahen's "Dynamic Technical Analysis (this is a French translation)
    Alan Farley's "The Master Swing Trader" is also useful

    Bollinger Bands was the 1st indicator that caught my eye when I 1st started trading - and I have persevered with it and found other meaningful (to me) interpretations - EXPERIMENT

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