Warning: If You Ignore Volatility, You Will Lose Money in Today’s Market
Source: http://feedproxy.google.com/~r/ContrarianProfits/~3/II7yjLyQ5lQ/17263Posted on Friday, May 29th, 2009 | In Market Commentary
The top 30 most volatile days for stocks since 1969, bar one, all occurred in 2008. The one exception was in November 1987, shortly after the Black Monday wipe out. These are the startling results compiled by one of our favorite market gurus Dr Van Tharp.
Tharp is a trading psychologist and the author of one of the best books ever written about making money in the markets, Trade Your Way to Financial Freedom. His key insight into trading is that position sizing as a way to control risk is critical to success.
Tharp used a measurement called Advanced True Range (ATR) to analyze market volatility since 1969. ATR is a way of measuring the degree of price movement of securities developed by J Welles Wilder and introduced in Wilder’s seminal 1978 book on trading, New Concepts in Technical Trading Systems.
By calculating the ATR as a percentage of the close of the S&P 500 index, Tharp reveals that the top 10 most volatile days for stocks in the last 30 years all occurred in October of last year. And that the period from March 3, 2009, to March 12, 2009, the beginning of the current rally, was one of the most volatile periods in history.
Why is this important? Well, as Tharp says, “recent volatility has been off the charts.” And every period of extreme volatility, with the exception of the March 2009 period, are associated with stock market collapses. (The top four most volatile periods since 1969 were October 9 2008 to November 7 2008; October 19 1987 to November 17 1987; July 22 2002 to August 9 2002; and September 27 1974 to November 4 1974.)
In other words, there’s a strong historical relationship between extreme volatility and bear markets – except in the case of the current rally in stocks. As readers know, we are deeply suspicious of the drivers of this rally. And Tharp’s work makes us even more so.
This doesn’t mean there’s not money to be made for nimble investors. But given that May’s volatility levels (as measured by ATR% close values) are still highly volatile, trend following, even on the short side, is unlikely to yield favorable results… unless you are able to withstand large whipsaw actions against you.
Tharp says one of the best ways to trade the market right now is an options strategy “that captures premiums with very little risk.” This is a highly advanced trading strategy. And you need Level 3 clearance from your broker to execute it. But once you get this clearance the results can be nothing short of stunning. Notes contributor and market “geek” Charles Delvalle scored a 100% win rate with this strategy last year. He calls it the “payout method,” because you literally get instant payouts to your account every month by capturing options premiums.
The average payout during the “alpha trial” phase was $2,504. Charles is looking for 365 more beta testers for highly lucrative strategy. If you’re interested in receiving these payouts in return for beta testing the strategy, follow this link to learn more. (Please act fast, as the next payout is due on June 19.)
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