​Volatility: An Investor’s Best Friend

Michael S. Young  |

Via Giphy

It’s a volatile time in history, and the fact that market volatility is the subject of much discussion should come as no surprise to investors. What’s important to realize, however, is that there is no need to fear volatility, if you understand how to harness its strength. Indeed, volatility’s value is its ability to provide outsized returns when navigated correctly. Therein lies a great opportunity!

Let’s take a step back and examine why volatility adds value. In Forex trading, volatility refers to the amount of uncertainty or risk involved with the size of value change in a currency exchange rate. On one hand, a lower volatility would mean that a cross rate (currency pairs) does not fluctuate forcefully, but will change in value at a steadier pace during a measured period of time. Alternatively, a higher volatility would mean that a cross rate is fluctuating greatly or has a fast moving price. Strong Forex trading systems thrive on this type of market condition; that is a condition of higher volatility.

Essentially, volatility is a statistical measurement of the movement of price for any given asset. Volatility can either be measured by using the standard deviation or the variance between returns from that same security or market index being measured. We like to call it a “Market Anxiety Meter.”

If you think about it, this is really what volatility is. It’s the measurement of the price movement when activity in the markets is happening. If volatility is low, the markets are calm and steady. If volatility is high, markets are fast and moving. Think of volatility like a feeding frenzy of sharks. When there’s very little blood in the water, there is less activity in that area (slow markets). With more blood in the water, the sharks become more frenzied while pursuing their prey (or market direction).

For Forex, FX Options are the best way to view volatility and really the only way investors have to measure the sentiment of a currency or asset.

Mediatrix Capital uses volatility systematically as a gauge for making price entries into the market. For example, when the market moves and breaks a high or low price level, it represents one way to confirm a directional market movement. However, if price breaks that level with low volatility, this typically means that market conditions will reflect a slow meandering move, or possibly be signaling a trend reversal.

Now, another scenario is that if we see these same price levels with volatility increasing at the same time, the probabilities are generally much higher that the market direction will continue in a fast aggressive motion. As we enter our trades, we will continue to add more positions if we see market directional confirmation and expanding volatility. As long as price continues to move in the expected direction and the volatilities are continually expanding, it is prime time to enter trades. However, if we start legging into a trade, and the systems see that the volatility is beginning to drop, the algorithm will stop adding any additional positions because the probability of price stagnation or the direction reversing is high. This is one major reason why we have been systematically successful is our ability to capture both of how price works and what effects price has in the short term.

Now, with the use of volatility within our programing, the ability to evaluate the Average True Ranges (ATR) in real time, and a few proprietary Indicators we systematically incorporate, we are able to offer a very effective trading system. In addition, consider incorporating the use of correlated pair hedge techniques, trailing stop losses, as well as our proprietary option wrap strategy to protect our portfolio from major currency index crashes.

Global Investors should understand that there is diligent maintenance of these data inputs so that our systems stay relevant over the long term. All markets change and evolve on a macro scale, and one of the reasons many algorithms work “until they don’t” is that they are not able to stay relevant through a landscape of macro-economic change. Additionally, most algorithms are not navigators, and it is also likely that most algorithm designers do not build their systems with a defense first strategy or with the mindset that systems and data analysis must change frequently as the markets and geo-political landscapes may impact various aspects of the currency markets on a flow forward basis.

In short, the key to successful trading is an understanding of what drives price and the current anxiety state of the markets. Volatility is a key component in the success of great trading formulas. When you attempt to read a situation in which the value of a currency pair changes suddenly and often, how else can you measure that behavior? There is high price fluctuation over certain periods of time so trading a market with steady, low price ranges and high erratic price ranges requires accurate planning and use of volatility as a meter to gauge probabilities. Again, combine this with other programming, indicators and defense strategies and a great track record becomes all the more exciting.

For further information, visit www.mediatrixcapital.com, write: info@mediatrixcapital.com or call 1-800-905-1006.


In no event should the content of this material be construed as an advertisement, express or an implied promise, guarantee or implication by or from Mediatrix Capital Inc. (MC) or any of its partner or subsidiary companies. This is not an attempt to sell or solicit any security and should not be taken as such. The content of this document is for informational purposes only. Potential Accredited Investors are advised to carefully read the Disclosure Documents to determine whether a managed investment in MC is consistent with their financial situations and investment objectives. Past results are no guarantee of future performance. Mediatrix Capital is a foreign corporation based in Sandyport Bahamas, and does not operate within the United States.

DISCLOSURE: The views and opinions expressed in this article are those of the authors, and do not represent the views of equities.com. Readers should not consider statements made by the author as formal recommendations and should consult their financial advisor before making any investment decisions. To read our full disclosure, please go to: http://www.equities.com/disclaimer.



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