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Nat Stewart
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Portfolio Manager and Research Analyst at Opus Capital Management.  
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Opus capital management
  • Use This Strategy To Profit From Market Volatility - Trading Volatility Breakouts In The SPDR S&P 500 ETF (SPY) 0 comments
    Oct 29, 2012 5:43 PM | about stocks: SPY

    In our last article on the volatility breakout trading strategy, we focused on explaining this trading method in easy to understand terms with clear examples. At the end of the article, It was suggested that simply knowing this general approach was not enough to make for a very profitable trading strategy. In fact, in certain markets and under certain conditions, taking volatility breakout trades can be very counterproductive.

    What is the key to making this strategy profitable? I want to share with you a few of the things that I have found to be highly effective when trading this approach in the stock index futures market (NYSE:ES) or stock index ETF (NYSEARCA:SPY).

    1. ) Volatile market conditions - This strategy works best when the market is frothy with the emotions of speculation and fear. Many would guess that buying upside volatility breakouts would be a great strategy to use during bull markets. In fact, this is often not the case. Bull markets frequently see volatility compress and trading ranges contract, which takes away the core market condition where this strategy thrives. In fact, 2008 (A year in which the S&P 500 was down around 40%) was perhaps the best year ever to be trading volatility breakout strategies in Stock Index ETF's or Futures.

    2.) Opening Gaps. Many traders believe that because markets trade almost 24 hours a day, gaps (as measured by day-session hours) are no longer useful as technical indicators. I have found this point of view to be false. Gaps have been and continue to be highly significant events for a number of different strategies, and this is particularly true for volatility breakouts.

    3.) The swing position of the market. By this i mean, "where is the current price relative to the recent trading range over "X" number of days? I used this concept in this article and applied it to just one day. However, it can also be applied to a longer period if time. I have found that on average, volatility breakouts work best when the direction of the breakout contradicts the swing-position of the market. By this I mean upside volatility breakouts work better when the prior day closed at the low end o the recent trading range, and downside volatility breakouts work better when the prior close was in the upper half of the recent trading range.

    By combining these three factors, you can come up with some very good trading strategies.

    Note, none of these ideas involve an ultra-complex pattern or any type of advanced calculations. I have known some traders who use very complex, "if - then" type logical statements that use a huge number of inputs in effort to find the best trading patterns for this approach. While this might work for some, I have found that by distilling ideas into the most simple, conceptual form possible, they tend to work better in real time.

    In our members-only report on volatility breakouts, I will share with you the exact indicators and settings I use to screen and trade volatility breakouts. I also document some of the historical evidence for this methods success. For short-term and swing traders, I believe this one report alone will be worth more than the cost of the entire service.

    Good Trading.

    Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

    Stocks: SPY
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