Volatility is About to Expand
On several occasions in the past, we’ve alerted readers to potentially big moves in markets using our Trend-Vol alerts, Precious Metals being the chief focus. Trend-Vol is an early warning system that focuses on several factors to predict movement. Those factors include: historical and implied volatilities, skewness and Bollinger Band width. This momentum indicator warns when volatility is about to increase and directional moves can be large, quick, and profitable, even after the original trigger goes off.
Simply put, and stated here often; volatility breathes. We believe that it is about to exhale soon in the Precious Metals, particularly Silver, but Gold is on the radar as well. What we do not know is in which direction the markets will head…. yet.
A Silver Trend-Vol Retrospective
We can show some historical behavior in Silver when the signal triggers using the chart above.
1. Here Silver gave a mid-day signal that you might have bought and held with a stop at the top band line which also coincided with the 100 SMA. You would have been rewarded with at least $1.50 had you knew where to place trailing protective stops. This even if you only bought the close of the break out day and held for 3 days.
2. This was a quick 2 day trade that had you again bought the close of a very strong day, you’d have had an opportunity to sell $1.00 to $2.00 higher the next day.
3. This is where the CME margin raises just proved to be too much for the market to bear. If you sold the initial day’s close despite it being over a $3.00 down day, you’d have still had $5.00 left in the move the next day, and if you were brave with overnight orders, another $3.00+ the next.
To be fair, as in every system, devils lurk in the details. Like, how to determine what an entry point is and what is a fake out; Where to put your initial stop-loss and how to trail-stop winners. These vary depending on the trader’s style bankroll and VaR management. This may help:Risk 1 to make 2-3 on your trades. Use daily low/highs and the Bollinger Band line for trail-stops The lowest risk signals come at end of day, midday signals may reverse hard. Conversely, waiting for end of day to confirm a signal, often misses a good chunk of the move. The best daily alerts often coincide with a 60 minute B-Band widening from a tight position.