How to measure probability of side ways move

To clarify I'm working on a strategy for selling 2-6 days DTE option strangles in equity index, SPX, NDX, R2K.

What I'm looking for is to identify change from trending mode or momentum mode into consolidation mode. Yes, it's related to volatility.

Tools/methods that can identify "stalling" "slow down" of strong trend momentum is of interest. Average True Range, Bollinger bands, MACD, what else there is out there.

I have a found a method which is discretionary where I can visually identify a stall of momentum on the chart. Would be nice to have something which is rule based/mechanical that can send me an alert by email or direct message. Don't have to watch and monitor the index chart every day.
 
If you are hell bent on shorting strangled,why don't you run backtests on VIX/HV (as opposed to price)using whatever voodoo you like to see if you can come up with anything???

FWIW,2-6 day short strangles are a pure gamma bet,and being somewhat right on direction and managing the short gamma are far more important than predicting what mode you are in...

What's your plan when wrong??
 
MacBookProHo said:
Trading is so much easier, or more profitable and successful, if you reasonably know what to hunt for, know what to generally expect for. And get in at the right moment, and leave around the right moment.
Similar to assassinating JFK. Imagine if Lee Harvey brought a machine gun on each arm...and randomly shot at the white house. Just...Hoping...to randomly strike the President on mere luck. Good luck with that approach. The man did his homework.

So many old and new traders try to merely trace lines with technical analysis....how many millionaires has that produced? Only the top dreams salesmen with the gift of the gab are the one's getting rich with that.
If you treat trading like a casino...you will get casino results. I can't really delve further without giving anything away.
Imagine being able to trade the daily S&P everyday....what would that be worth to you, or anyone else?
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Hello MacBookProHo,

When you state "daily S&P":

Are you referring to Daily /ES bars ?

Thanks
 
volpri said:
Pullbacks in a trend are a small range of sorts then the trend resumes. It is important WHEN to determine if a sideways to down movement in a bull trend is just a PB, or is price actually going into a range. The best way I know to know how is to give it 15 to 20 bars of sideways movement. That, in itself establishes the boundaries of a range. Once I have determined it is a range condition as opposed to a PB then I use range trading tactics. Fading the top and bottom limits. And of course averaging down at times as I fade the limits.

The probabilities are high that the range, once established, will continue for a while. About 70% to 80% of the time price will meander back and forth in an ESTABLISHED range. You can prove this to yourself by looking visually at any price chart that has an established range. Markets have inertia and tend to keep doing what they are doing until they do in fact change. Examples: a trend continues with PBs until the PB morph into a range. A range continues as a range until there is a SUCCESSFUL BO OF THE RANGE. You can find the definition of a successful BO in my journal if you have a mind to study it.

https://www.elitetrader.com/et/thre...-trading-the-es-nq-ym-mes-mnq-and-mym.336259/

Of course in bear trends it would be a sideways to up move that I would watch to see if that reaction is a PB only or is it morphing into a range. Same rules as above apply.

Here is an old example of mine. Remember, in a range condition, most BO ATTEMPTS FAIL. We can capitalize on that phenomena. One BO will eventually succeed then market conditions change into a trend. Then that will require different tactics for trading entries and exits. This stuff repeats over and over again and again in ALL markets. It is called the market cycle. You can see it on this weeks charts or on charts 80 years old. Not much is really new in PA. We just didn’t know to call it price action years ago. All consolidations and accumulations are just range PA behavior. They are some of the most lucrative environments to trade in as they offer so many opportunities to trade.

Unfortunately most retail traders today don’t like range trading and especially the day traders refer to it as “chop”. That is because they use the wrong tactics and get whipsawed around.



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Good Morning Mr. volpri,

I LOVE what you wrote. Love it.

I have found my life much easier just being a complete slave to price behavior and do whatever price is doing whenever I see price doing whatever it is doing.

And "Grab_them_damn_profits"

Thank you,
 
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bln said:
What are good methods or tools to predict or measure the likelihood of side ways price movement X time units forward?
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Hello bln,

I do not have a suggestion for you.

But for the sake of keep-it-simple, why not just trade whatever you see on the chart.
 
I use the models more for a safety check/confirming indicator.I dont like to shoot against them..Similar to how I incorporate fundamentals/Discounted Cash Flow models. Its also a bit helpful if trading term structure and longer dated options.

I find Volatilty Cones more helpful...

Hoadley is fun to play around with







Baozi said:
@taowave may I ask what's your experience with ARCH/GARCH models? I occasionally check some online models (https://vlab.stern.nyu.edu/volatility) but I can't shake that feeling that it's not much better than a monkey throwing darts at a board..
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taowave said:
If you are hell bent on shorting strangled,why don't you run backtests on VIX/HV (as opposed to price)using whatever voodoo you like to see if you can come up with anything???

FWIW,2-6 day short strangles are a pure gamma bet,and being somewhat right on direction and managing the short gamma are far more important than predicting what mode you are in...

What's your plan when wrong??
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Valid points.

In reality both the legs of the short strangle are covered. The upper Call leg is covered by long term position in the index and the lower Put leg is covered by portfolio margin buying power. I will hold the strangle until expiration/cash settlement. If need to defend a leg I may do delta hedging of that side.

Why I'm attracted to the strangle is because it provides uncorrelated/anti-correlated returns and that is something I want as it will smooth out long term portfolio volatility and lower over all risk.
 
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