Why do Indexes lose volatility?

[hamrawein]

Quote from fseitun:

I suggest you first indicate what type of volatility you are looking for.

As a daytrader, I measure volatility in terms of # of ticks per day. That's all that matters to me.

I am sure this would change if I were a swing trader.

How would you like to measure volatility?

Apologies that my post wasn't complete. I'm basically looking for the historical volatility based on historical data. Something like:

Let the continous compounded return be:

u = ln ( S(i) / S(i-1) )

where S is the stock price and i is the interval.

I'm looking for the following:

Stdev = sqrt ( (1/n-1) * Sum ( u(i) - u(mean)^2 )

Or in other words: Seeking Stdev based on countinous compounded returns for the YM, ES, ER2, etc...

Thanks

 

[fseitun]

Quote from hamrawein:

Apologies that my post wasn't complete. I'm basically looking for the historical volatility based on historical data. Something like:

Let the continous compounded return be:

u = ln ( S(i) / S(i-1) )

where S is the stock price and i is the interval.

I'm looking for the following:

Stdev = sqrt ( (1/n-1) * Sum ( u(i) - u(mean)^2 )

Or in other words: Seeking Stdev based on countinous compounded returns for the YM, ES, ER2, etc...

Thanks

I am not a math guy so I can't nor am I interested to understand the above formula.

Perhaps you should look elsewhere within ET to find your answers as I see you are very math-oriented.

Cheers

 

[whitster]

"Right now ER2 and NQ seem to be the hot futures indexes to trade. I am sure at some point in time either of them will become less attractive and perhaps YM will become the hottest thing."

your post is based on the assumption that volatility in the indexes makes them better to trade.

this is not necessarily true. it just requires different methodology to trade low volatility environment vs. hi volatility environment.

the latter, for example, works better with "breakout strategies", trend following, and larger stops.

none of which i am particularly fond of, myself.

the key is finding a market that suits your personality, and knowing which setups to use in which market environment.

volatile is not necessarily better

looking over my stats the last 2 months, the vast majority of my trades are 'fade' variety

that tends not to be good strategy in a volatile and/or trending market.

but the market i trade has not been either very often, especially on an intraday basis.

one thing about the YM is that it has the best spread. it is also not infected by arcade traders, like the ES, which imo gives it smoother, more tradeable moves.

 

[gnome]

Quote from fseitun:

I would like to understand why Indexes like ES lose their volatility at some point in time.

Any expert in here that can provide sound reasons as of why indexes become less volatile and more difficult to trade?

Volatility declines when risk concerns decline... complacency. Also, there are derivatives players can buy for a hedge so they don't have to sell stocks.

When volatility returns, I believe it will be temporary. Then, the trend toward lower volatility will resume.... and will progress to even lower volatility still.

Eventually, the volatility will approach zero. At that time, only automated black boxes will be trading... scalping for ticks... fastest gun wins.

It will be like a gigantic, worldwide game of financial Slap Jack! Hahahaha

 

[Malinois]

Quote from fseitun:

And to answer your questions, I am not trying to understand why people lose interest in a certain instrument.

In fact, I pointed out how ES dropped in volatility yet it more than doubled its daily volume.

ES clearly become more popular and more interesting, more traders have joined it yet its volatility has made less it attractive to my trading style.

Of course, it depends on what your trading style is. If you are a position trader, ES might be a good instrument.

If you are a daytrader, I believe there are better instruments out there to trade such as ER2, NQ and even YM, which averages about 100 ticks per day.

Volatility creates opportunities, and opportunities usually lead to money.

Agree with you. ES is not the best market unless you are trading a very large account and need to move size. Most smaller daytraders would do better in a more volatile market. IMHO

 

[rateesquad]

Quote from fseitun:

I would like to understand why Indexes like ES lose their volatility at some point in time.

Any expert in here that can provide sound reasons as of why indexes become less volatile and more difficult to trade?

Do they become more efficient?

Right now ER2 and NQ seem to be the hot futures indexes to trade. I am sure at some point in time either of them will become less attractive and perhaps YM will become the hottest thing.

Why does this happen?

When markets (ER2) are going up usually VIX goes down.
When markets (ER2) go down usuallu VIX goes up.
This indicates volatility in markets.


When markets (NQ) are going up usually VNX goes down.
When markets (NQ) go down usuallu VNX goes up.



http://topgunfinance.blogspot.com/

 

[fseitun]

Quote from whitster:

"Right now ER2 and NQ seem to be the hot futures indexes to trade. I am sure at some point in time either of them will become less attractive and perhaps YM will become the hottest thing."

your post is based on the assumption that volatility in the indexes makes them better to trade.

this is not necessarily true. it just requires different methodology to trade low volatility environment vs. hi volatility environment.

the latter, for example, works better with "breakout strategies", trend following, and larger stops.

none of which i am particularly fond of, myself.

the key is finding a market that suits your personality, and knowing which setups to use in which market environment.

volatile is not necessarily better

looking over my stats the last 2 months, the vast majority of my trades are 'fade' variety

that tends not to be good strategy in a volatile and/or trending market.

but the market i trade has not been either very often, especially on an intraday basis.

one thing about the YM is that it has the best spread. it is also not infected by arcade traders, like the ES, which imo gives it smoother, more tradeable moves.

You make a good point. Different markets for different trading styles.

In fact, this post was aimed at understanding why volatile indexes lose their volatility. Like ES.

Why do you think YM has the best spread? Isnt't its spread 1 point - one tick - like all other markets?

Isn't the spread for ER2 .10? Isn't the spread for NQ .25?

Spreads all look the same to me. Am I missing something?

 

[whitster]

yes, you are missing something about the spread.

the minimum spread is ALWAYS 1 tick.

it can be more, but never less

the issue is what is the tick size in relation to the average true range. this increases your ability to get in at a better price, and get out with yer target.

the ES is at the 1400 area

the YM is in the 12,200 area

generally speaking, when the ES moves 1 point, the YM moves 8-10 points.

the tick in the ES is 1/4 point

the tick in the YM is 1 point

so, in a 8-9 point YM move, there are 8-9 different exit/entry points

in an equivalent move on the ES, which is 1 point, there are only 4 exit entry points.

roughly speaking, the YM has TWICE as good (a little bit more actually) spread as the ES.

that ALONE, makes the YM a vastly superior instrument, depending on yer timeframe.

if you are trading 3 week swing trades, the tick size difference is mostly insignificant.

if you are making multiple trades per day, it is VERY significant.

here are the last 20 days daily range

the average ES range is 9.49 points
the average YM range is 83 points

the last 10 days

the average ES range is 9.4
the average YM range is 84

this kind of stuff is CRITICAL to trading success. if you are a scalper, it is incredibly important.

imo, the YM is superior for a # of other reasons, but this is just basic stuff here.

 

[whitster]

to get even more specific.

if you have a target 8 points away from yer entry, and the YM moves 9 , you are GUARANTEED to meet your target

in a 1 pt ES move (4 ticks) the ES has to move FIVE points for you to get your guaranteed exit on the 4th tick

again, i use limit orders and can often get out without the price moving through my target, but u can see again why spread is CRITICAL.