Gold Trading Boot Camp: How to Master the Basics and Become a Successful Commodities Investor

CHAPTER 21

Historic Volatility and Volatility Bands

Reading volatility is yet another subjective exercise.

There are two primary ways I look at volatility:

1. I observe volatility from a historic perspective.

2. I look at volatility for the application of bands to intraday charts, for use as a timing mechanism, and for the definition of short-term pivot points.

Looking at historic volatility, the intent is to learn something about the trending characteristics, or lack thereof, exhibited by a market. I do this by comparing historic volatilities over multiple time frames.

A market where the 21-day volatility is rising and is higher than the 50-day volatility that is also rising, and has just moved above the 100-day measure would be signaling an acceleration in whatever direction it was moving.

The subjective nature extends from the fact that a volatility alignment such as the one just described could define either a significant trend reversal in the making, following a prolonged low-volatility trend or a fresh breakout and newborn trend in the making, extending from a sideways, nontrending market.

In the first case, I might look to employ some countertrend techniques on a low risk, shorter-term speculative basis. Or, as an investor, I might seek to tighten my stop-order protection. This would most likely occur where giveback is intensifying, in terms of holding what is still a longer-term profitable investment, but where the reversal is accelerating and causing pain.

In the second ...