Just A "Normal" Day - August 12, 2011

[brrim]

Billy; On 8/10 you wrote "The volatility stop with settings 65,5 on the 30 minutes chart has contained all bounces in the decline. It is at 69.69 or just above yesterday’s high. A reversal of the stop could have bullish short term implications. I remind everyone that one needs to wait for the CLOSE of a 30-minute bar above the volatility stop for a confirmed signal, temporary violations are an alert, but not a confirmation."

Today the V stop reversed on IWM and is now below price. Why is this now not bullish and suggestive that the rally has further to go?
Why do you not like using this as an actual stop?
On today's chart you have moving VWAP 52 whereas on 8/10 the moving VWAP was 26. How do you decide which to use?

Thank you for all of your help.
Best regards,
Robert

[Billy]

[Robert,

“Today the V stop reversed on IWM and is now below price. Why is this now not bullish and suggestive that the rally has further to go?”

Under normal market conditions, a volatility stop reversal is bullish once it is decisively broken. If it is a true breakout with true trend reversal, you will see price quickly gain momentum above the old stop level. On Friday, both SPY and IWM stalled and closed below the old stop. This is suggestive of a failing breakout and of a potential short term bull trap in the making. Another possibility is that the trend “reversal” is just from down to sideways, and the expected new trading range lows would be bounded by the new volatility stop underneath.

“Why do you not like using this as an actual stop?”

I use my own “volatility” stop based on ATR% as my risk management technique. This is also used by the robots. It is much more advanced and parameters of ATR % do change as the trade evolves over time. I have no backtesting available for the standard (65,5) volatility stop but have extensive backtesting for my stop technique. My experience has been that entering a countertrade at or near the (65,5) volatility stop with a tight stop is an excellent reward-risk approach. There were many examples that I gave in real-time in the old VIT forum with my discretionary trading and should be found in the VIT archives.

“On today's chart you have moving VWAP 52 whereas on 8/10 the moving VWAP was 26. How do you decide which to use?”

Don’t put too much emphasis on my moving VWAP parameters as I modify them all the time. On 8/10, I was looking at a 2-day VWAP (26 x 30 minutes) and on Friday’s morning it was the 4-day VWAP (52 x 30 minutes). I most often monitor the VWAP from the first bar of each week, increasing by one unit every 30 minute.
Billy

[adam ali]

Billy, not to be pedantic, but if I read your messages correctly, Robert says the IWM ended above the vol stop on Friday, while you're saying it stalled below. Could you clarify - thanks.

[Billy]

Billy, not to be pedantic, but if I read your messages correctly, Robert says the IWM ended above the vol stop on Friday, while you're saying it stalled below. Could you clarify - thanks.

Adam,
On Thursday, 3:00 pm, the (65,5) V Stop was at 69.69. At 3:30 pm, the 30-minute bar closed at 69.81 and reversed the stop. Since then, the high for IWM on Friday has been 70.60 on the opening bar and it closed at 69.79 or only 10 cents above the old VStop. The “stalling” was in reference to action after the open. I was wrong by 10 cents about IWM closing below the old VStop, but it was true for both SPY and QQQ. Certainly not a decisive market “trend reversal" so far.
Billy

[adam ali]

Got it - thanks

[brrim]

Billy; Thank you for your very detailed answer. It is very helpful.

Robert