Basic Techniques  |  JUN 2003

Using Implied Volatility And Volume by Scott Castleman

Using Implied Volatility And Volume by Scott Castleman Construct a trend-following system that adjusts to current market conditions. Traditionally, technicians have relied on historical prices to analyze the market. They have created many different indicators to predict the direction of prices by basing their calculations on past data. However, these indicators may fail to work prospectively when markets do not repeat their historical patterns. Thus, using these indicators to forecast market direction is like trying to drive a car by looking in the rearview mirror. Any change in the road ahead could lead to disaster. When we are searching for ways to forecast the direction of the market, it is essential to characterize the market with current information. Two such ways of describing the market are with implied volatility and volume. Using implied volatility and volume as parameters, you should be able to construct a profitable trend-following system by adjusting the number of days referenced in a simple DonchianƯ-style breakout system. This allows the system to adjust itself to reflect current market conditions.

by Scott Castleman