Volatility can be an important part of a trading system.
So that we’re all on the same wavelength I’m talking about the kind of volatility that measures the deviation from an average price. It’s sometimes called statistical volatility.
I’ve never heard anyone say they hoped to buy a stock or ETF and have it flat line at the purchase price.
Volatility can help you find stocks that move.
One measure of volatility that uncovers stocks with some get up and go is historical volatility(HV). There are two popular calculations: HV 50 and 6/100 HV. HV 50 is the volatility reading of a particular security over the past 50 days. 6/100 HV is a ratio of the 6 period and 100 period HV.
My basic stock screen incorporates the HV 50. I build a watch list based on price, volume, and those stocks trading at or above a HV of 40.
The 6/100 HV is best used as a filter in a trading system. Track stocks with a low 6/100 HV , ideally below 50. Those stocks should be closely watched for potential trades because a sharp move could come at any time.
One of the best trading systems of recent times uses volatility. I posted about it HERE.
These are a few screen shots of stocks that exhibited low volatility prior to their breakout. Watch for the green arrow on the charts that mark the buy signal — go long above that bar’s high.
Volatility will not tell the direction of the move, only that a sharp move may be imminent.
Once you incorporate volatility, either the HV 50, 6/100 HV, or both, I think you’ll find that your watch list contains more “active” stocks!
