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Trading Market Volatility for short term prof

Trading Market
volatility for
Short term
Profits
Copyright © 2008 by Benny Lee, NextVIEW for ATIC Singapore 2008
Trading Market Volatility for Short Term Prof
Pro
INTRODUCTION Picture 6

1996 :
• Got into the stock market frenzy while in college
• Started attending some technical anaysis seminar
• Got first charting software, MetaStock

1997 :
• Started trading the futures market in 1997.
• Was against the trend, Lost heavily

1997 – 1999 :
• Worked in a Recruitment Agency (Need to pay back debts!).
• Started to study about trading. Discovered and learned mistakes
• Developed trading strategies and traded lightly. Benny Lee
• Learned about Automated Trading Strategies

1999
• Started trading privately. Stocks and Futures, Malaysia and Singapore.
• Started learning TradeStation and Omnitrader.
• Training Consultant to a Software Company. (This was when my training experience
started)
Copyright © 2008 by Benny Lee, NextVIEW for ATIC Singapore 2008
Trading Market Volatility for Short Term Prof
Pro
INTRODUCTION
2004 till present:
• Still trading privately
• Joined NextView Group as Regional Trainer, later as Chief Market Strategist

Training/Coaching Experience (More than 8 years):


Professionals and Retail Investors in Malaysia, Singapore, Thailand,
Vietnam, Pakistan and Hong Kong

Speaking Engagements (More than 6 years):


Malaysia, Singapore, India, Indonesia and Thailand
Copyright © 2008 by Benny Lee, NextVIEW for ATIC Singapore 2008
Trading Market Volatility for Short Term Prof
Pro
INTRODUCTION

Copyright © 2008 by Benny Lee, NextVIEW for ATIC Singapore 2008


Trading Market Volatility for Short Term Prof
Pro
Introduction to Market Volatility
• Volatility refers to the degree of (typically short-term) unpredictable
change (often aggressive) over time.

• A volatile market is when price changes aggressively and


unpredictably in a large degree.

• A volatile market is often viewed as negative because of market


uncertainty.

• However, volatile markets provide short term trading opportunities for


traders to make fast and big returns.

Copyright © 2008 by Benny Lee, NextVIEW for ATIC Singapore 2008


Trading Market Volatility for Short Term Prof
Pro
Introduction to Market Volatility
The Weekly FTSTI chart below shows expanding Bollinger Bands,
which means increasing volatility

Copyright © 2008 by Benny Lee, NextVIEW for ATIC Singapore 2008


Trading Market Volatility for Short Term Prof
Pro
Introduction to Market Volatility

Traders and investors always try to find out the best price to buy or sell by
identifying the “low” and “high”. Buy Low, Sell high is every traders
objective.

1. When price moves to a certain extent which is considered “Low”,


there is a high chance of traders getting ready to buy.

3. When price moves to a certain extent which is considered “High”,


there is a high chance of traders getting ready to sell.

How Low is “Low” and how high is “high”?

Copyright © 2008 by Benny Lee, NextVIEW for ATIC Singapore 2008


Trading Market Volatility for Short Term Prof
Pro
Introduction to Market Volatility

Identifying Low and High Price Levels:

3.Support and Resistance


Identify levels where price is supported in a trend or sideway market.

7.Maximum Volatility
Price tends to reverse once it reaches a degree of volatility

Price tends to reverse upwards after a certain degree of downward


movement, thus creating a support or “low” price level.

Price tends to reverse downwards after a certain degree of upward


movement, thus creating a resistance or “high” price level.

Copyright © 2008 by Benny Lee, NextVIEW for ATIC Singapore 2008


Trading Market Volatility for Short Term Prof
Pro
The Bollinger Bands

The Idea Behind Bollinger Bands:

Standard Deviation is often used to measure volatility.

“Volatility = Standard Deviation”

Standard Deviation is a mathematical formula showing how price spread


around it’s “true value”.

Standard Deviation has an edge. It can dynamically portray the volatility


of a price. Therefore, it can provide an adaptive trading bands instead of
static bands like a trend channel in which was widely believed at the time.

Copyright © 2008 by Benny Lee, NextVIEW for ATIC Singapore 2008


Trading Market Volatility for Short Term Prof
Pro
The Bollinger Bands

The Idea Behind Bollinger Bands:


Standard Deviation formula:

The normal Distribution Chart

Mean, “True value”


Copyright © 2008 by Benny Lee, NextVIEW for ATIC Singapore 2008
Trading Market Volatility for Short Term Prof
Pro
The Bollinger Bands

The Idea Behind Bollinger Bands:

In a normally distributed data, about 68% of the prices are within 1


standard deviation of the mean, about 95% of the values are within 2
standard deviations and about 99.7% lie within 3 standard deviations.

Copyright © 2008 by Benny Lee, NextVIEW for ATIC Singapore 2008


Trading Market Volatility for Short Term Prof
Pro
The Bollinger Bands

The Idea Behind Bollinger Bands:


So, what John Bollinger would like to believe the price is that, most of the
time the price is within in the range of 2 Standard Deviation of the mean
price (he uses the moving average to reduce price noise) with a 95%
chance. If price goes above or below the 2 standard deviation, it should
come back to its mean (assuming the price movements in the financial
market is a normally distributed data.

Copyright © 2008 by Benny Lee, NextVIEW for ATIC Singapore 2008


Trading Market Volatility for Short Term Prof
Pro
The Bollinger Bands

The Idea Behind Bollinger Band:


Upper Band = 20 day simple moving average + 2 standard deviations
Middle Line = 20 day simple moving average (used as the “mean”)
Lower Band = 20 day simple moving average - 2 standard deviations

Copyright © 2008 by Benny Lee, NextVIEW for ATIC Singapore 2008


Trading Market Volatility for Short Term Prof
Pro
The Bollinger Bands

The Idea Behind Bollinger Bands:


• Based on the theory that has been discussed, John Bollinger creates
his own indicator and called it the Bollinger Bands to expand his
trading horizon by determining and capturing the extreme price
movement in the trading products; Stocks, Futures, Commodities, etc.

Daily
The Bollinger Bands is made up of three lines.

The upper band is the 20-day simple moving


average plus 2 standard deviations.

The centerline is the 20-day simple moving


average.

The lower band is the 20-day simple moving


average less 2 standard deviations.

Copyright © 2008 by Benny Lee, NextVIEW for ATIC Singapore 2008


Trading Market Volatility for Short Term Prof
Pro
The Bollinger Bands
Uses of Bollinger Bands Indicator:

1. To determine a Mid-term trend (on daily chart); 20 days Simple or


Exponential Moving Average is used.

3. To determine support and resistance; Upper line as resistance (overbought)


and lower line as support (oversold).

5. To identify volatility; The expansion or contraction of the upper and lower


bands show increasing or declining volatility respectively.

Copyright © 2008 by Benny Lee, NextVIEW for ATIC Singapore 2008


Trading Market Volatility for Short Term Prof
Pro
The Bollinger Bands
Uses of Bollinger Bands Indicator:
1. To determine a Mid-term trend (on daily chart); 20 days Simple or
Exponential Moving Average is used.

The direction of 20 days MA


is pointing downwards
= Midterm DOWN trend

The direction of 20 days MA


is pointing upwards
= Midterm UP trend

Copyright © 2008 by Benny Lee, NextVIEW for ATIC Singapore 2008


Trading Market Volatility for Short Term Prof
Pro
The Bollinger Bands
Uses of Bollinger Bands Indicator:
1. To determine the support and the resistance; Upper line as resistance
(overbought) and lower line as support (oversold). (Most analysts like to
use it)

Copyright © 2008 by Benny Lee, NextVIEW for ATIC Singapore 2008


Trading Market Volatility for Short Term Prof
Pro
The Bollinger Bands
Uses of Bollinger Bands Indicator:
3. To identify volatility; The Standard Deviation during calculating the bands
lead to visual effect of Expansion and Contraction.

Band
Contracting

Band
Expanding

Copyright © 2008 by Benny Lee, NextVIEW for ATIC Singapore 2008


Trading Market Volatility for Short Term Prof
Pro
How to recognize trading opportunities?

For Short Term Trading.

There are many ways to use the Bollinger Bands, but the best way to identify an
entry for short term trading is from

v)a volatility breakout after a period of low volatility

The volatility breakout causes the price to move aggressively into a direction and
would normally start to ease once it reaches a degree of volatility, which I call it
maximum volatility. Therefore, the best way to exit is from

ii) The degree of volatility has reached its maximum level.

Copyright © 2008 by Benny Lee, NextVIEW for ATIC Singapore 2008


Trading Market Volatility for Short Term Prof
Pro
How to recognize trading opportunities?

It’s difficult to identify the period of low volatility and maximum volatility if we
use the Bollinger Bands. It is easier if we could chart the difference between
the bands.
Copyright © 2008 by Benny Lee, NextVIEW for ATIC Singapore 2008
Trading Market Volatility for Short Term Prof
Pro
How to recognize trading opportunities?
Scanning stocks to trade based on Bollinger Bands Indicator

Based on Matt Blackman in his article “Profiting From The Squeeze”, it


is easy for us to identify volatility changes and cycles.

According to him, equities alternate between periods of low volatility,


followed by periods of high volatility, and so on.

So, we can determine Expansion or Contraction of Bollinger Bands by


using Bollinger Bands Width.

Bollinger Bands Width = (UPPER LINE value – LOWER LINE value)


20 days of Simple Moving Average

Copyright © 2008 by Benny Lee, NextVIEW for ATIC Singapore 2008


Trading Market Volatility for Short Term Prof
Pro
How to recognize opportunities on the Chart?
Scanning stocks to trade based on Bollinger Bands Indicator

Bollinger Bands Width = (UPPER LINE value – LOWER LINE value)


20 days of Simple Moving Average

Disclaimer
There is a risk of loss in trading. The author will not be responsible for any losses or loss profits resulting from investment decisions based in the use
of the information contained in this printed material, or otherwise.

This course / printed material is intended to provide accurate and authoritative information with regard to the subject matter covered. It is taught or
distributed with the understanding that the author is NOT engaged in rendering any investment or other professional advice. If investment or other
professional advice is required, the services of a competent professional person should be sought.

Copyright © 2008 by Benny Lee, NextVIEW for ATIC Singapore 2008


Trading Market Volatility for Short Term Prof
Pro
How to recognize trading opportunities?
1. Choose the low volatility level

Copyright © 2008 by Benny Lee, NextVIEW for ATIC Singapore 2008


Trading Market Volatility for Short Term Prof
Pro
How to recognize trading opportunities?
2. Choose the maximum volatility level

T2

T1

Copyright © 2008 by Benny Lee, NextVIEW for ATIC Singapore 2008


Trading Market Volatility for Short Term Prof
Pro
How to recognize trading opportunities?

Entry:

When the Band Width decline to its “low” level, get ready for a trade.

If price is above the middle band, go long

If price is below the lower band, go short

Exit:

Exit Long or Short position when the Band Width advances to the maximum
level

For Long, if price goes below the middle band, exit


For Short, if price goes above the middle band, exit.

Copyright © 2008 by Benny Lee, NextVIEW for ATIC Singapore 2008


Trading Market Volatility for Short Term Prof
Pro
How to recognize trading opportunities?

Copyright © 2008 by Benny Lee, NextVIEW for ATIC Singapore 2008


Trading Market Volatility for Short Term Prof
Pro

THANK YOU!
I wish you all success in
your trading endeavor
benny@thenextview.com
Copyright © 2008 by Benny Lee, NextVIEW for ATIC Singapore 2008