Trading strategy: Volatility Rider
Volatility Rider is a trading strategy based on significant changes in volatility. The changes are called break-outs. Trading strategies based on volatility break-outs assume that an evolution in volatility from very low to low, to medium and, finally, to high is significant. The Volatility Rider strategy is based on a specific new indicator developed by German trader-author Claus Grube. It is a day trading strategy for spot forex and currency futures trading.
|Suitable for||: Forex (EUR/USD …)|
|Instruments||: Currency futures and forex|
|Trading type||: Day trading|
|Trading tempo||: 1 Signal per day|
|Using NanoTrader Full||: Manual or semi-automated|
The strategy in detail
Volatility indicates the difference between the high and low prices of a market. To measure volatility active investors tend to use either the Average True Range (ATR) or the Standard Deviation.
Instead of working with these classic indicators the strategy is based on a new volatility indicator called VolaRider. This indicator applies the concept of stochastics to the standard deviation. This approach results in a percentage value ranging from 0% (lowest volatility) to 100% (highest volatility). In short timeframes the value will be mostly in the extreme zones. Volatility is usually either low or high. It is rarely in the middle.
As with any indicator expressed in percent (0% to 100%) it is necessary to define threshold levels. The Volatility Rider strategy uses 21% and 89%. Both are Fibonacci numbers. At the 21% threshold it is safe to assume that volatility is building up and getting ready to take off. Above the 89% threshold volatility will start to reach its peak. In this zone it becomes likely that the volatility will decrease. This indicates that the break-out is losing steam.
This example shows the VolaRider indicator in the lower half of the screen. The 21% threshold (green line) is crossed first when volatility increases. Volatility continues to increase and the 89% threshold is crossed, indicating volatility is reaching its peak.
The Volatility Rider strategy is applied on a 10-minute chart. It is possible to experiment with other timeframes. In the trading platform it is also possible to change the threshold levels.
When to open a position?
A signal occurs whenever the indicator goes above the 21% threshold. The direction of the signal (buy or short sell) is not determined by the indicator. The direction of the trade is determined by the trend filter. The trend filter is based on exponential moving averages. When the trend filter is bullish the signal appears as a buy signal (green triangle) in the trading platform. When the trend filter is bearish the signal appears as a short sell signal (red triangle).
In this example the signal triangle is a green buy signal. The trend filter considers the increased volatility an opportunity to buy.
In this example the signal triangle is a red short sell signal. The trend filter considers the increased volatility an opportunity to short sell.
When to close a position?
The Volatility Rider strategy uses a combination of two stops. There is no profit target.
The initial stop is a trailing stop. The distance of this trailing stop is 3x the Average True Range (ATR) calculated over 24 periods. The second stop goes live and replaces the existing stop when the indicator crosses the 89% level. When this level has been crossed the stop is always on the close of the preceding candle. The logic behind the second stop is evident: the volatility has reached its peak and it is time to close the position.
In this example shows a short sell signal. The market does not go down but moves sideways. The position is stopped out with a small loss.
In this example shows a short sell signal. The volatility continues to increase and reaches the 89% level. At that level the trailing stop based on the ATR is replaced by the trailing stop which lies on the close of the preceding candle. The market price hits the stop at 16:30. The short position is closed with a profit.
The Volatility Rider strategy is based on an innovative indicator developed by trader-author Claus Grube. This indicator tries to monitor and visualize the evolution of the volatility. A position is opened whenever there is a spurt in volatility above a clearly defined level. If the position is still open when volatility peaks the position is closed. It is a day trading strategy suitable for trading currencies. Active investors can either use spot or CFD forex or currency futures.