Volatility-Based Technical Analysis, Companion Web site: Strategies for Trading the Invisible

483 Pages·2009·15.335 MB·English

by  Northington, Kirk

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$75.00 USA/$90.00 CAN
[ CONTINUED FROM FRONT FLAP ]
(cid:127) Part Three focuses on exact trade setups—with
discussions of a new technical analysis concept
known as Volatility Shift and how to exploit it—and
details the process of developing volatility-based In today’s markets, you won’t get very far by using
PRAISE FOR
technical analysis components. It also examines outdated technical indicators and methods known to
VOLATILITY-BASED TECHNICAL ANALYSIS
the importance of forecasting the broad market’s everyone. With institutions implementing innovative new
short- and intermediate-term direction. tools in their trading endeavors and professionals profi t-
ing from spotting signs that an individual trader might
Along with the practical insights found throughout these “Kirk delivers what may be the most timely investment book ever—the miss, you need something to level the playing fi eld.
pages, you’ll also be able to build your knowledge base That’s why Kirk Northington has created Volatility-Based
volatility of the recent bear market led to large losses for many. This book
with information found on this book’s companion Web Technical Analysis.
site (www.tradingtheinvisible.com). This site contains clearly presents a complete methodology to profi t from that volatility.”
free trial versions of programmable technical analysis As the President of Northington Trading, LLC, and a devel-
— MICHAEL CARR,CMT, Chief Market Strategist, Dunn Warren Investment
software as well as more examples and exercises that oper of technical analysis systems based on adaptive
tie into the text. Advisors, and Editor of the Market Technician Association’s newsletter, volatility, Northington knows how larger market-moving
players create profi ts. Now, with this accessible guide,
Technically Speaking
Designed with the serious trader in mind, Volatility- he bridges the gap between resource-rich institutions
Based Technical Analysis skillfully highlights how to and individual traders by revealing how you can locate
VVOOLL AATTIILLIITT YY--
use unique volatility-based tools to successfully trade “Volatility-Based Technical Analysis is an outstanding study on hidden hidden mathematical structures on price charts and
today’s institutionally dominated markets. “trade the invisible.”
opportunity in the fi nancial markets. Its razor-sharp focus on practical
applications and detailed statistical proofs should earn the book a Written for those who want to adapt technical analysis
to the volatility forces at work in today’s markets, this
cherished spot on every trader’s bookshelf.” BBAASSEEDD
reliable resource contains all original, highly technical,
— ALAN FARLEY, Editor/Publisher of the Hard Right Edge and author of mathematical-based volatility indicators, complete with
KIRK NORTHINGTON is the President of Northington MetaStock® and TradeStation® code; all presented without
The Master Swing Trader
Trading, LLC, a developer of technical analysis systems calculus. Throughout the book, you’ll not only discover
based on adaptive volatility for swing trading. The how to build your own indicators and test them, but also
company’s fl agship software product, MetaSwing, is an learn how to incorporate original components into your
“In these times of high volatility, traders need to be armed with tools that
add-on toolkit for users of MetaStock technical analysis specifi c trading methods.
software. In addition to system design, Northington will help them gain an advantage in the marketplace. In my opinion, this
Trading trades stocks on the NYSE and NASDAQ ex- Volatility-Based Technical Analysis is divided into three
book should be required reading for anyone who is serious about learning
changes. Kirk has previously held positions in several comprehensive parts:
Fortune 500 companies, with experience in engineering, technical analysis.” Includes
digital control system design, and project management. — AJ MONTE, CMT, Chief Market Strategist, The Market Guys, Inc. MetaStock® and • t Praardte Orsn em ouusttl ionveesr cthoem me,a wnhyi loeb csatarecfluelsly in ladyivinidgu oaul t how
TradeStation® market changes since 2000 have produced the need
S
TT T Code for volatility measurement in all aspects of technical
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analysis.
EE T A
JACKET ILLUSTRATION: ZACHARY NORTHINGTON IN IN RA TE
JACKET DESIGN: C. WALLACE VV D G • Part Two explores arithmetic measurements of volatil-
ISIS IN IE STRATEGIES FOR TRADING THE INVISIBLE ity—within exercises that create custom indicators—
IBLIBL G S F and delves into specifi c techniques for creating those
EE O indicators. It also focuses on retrofitting classic
R + COMPANION WEB SITE technical indicators with volatility measurement
and introduces the concept of Projected Implied
Volatility (PIV).
[ CONTINUED ON BACK FLAP ]

Volatility-Based
Technical
Analysis
Founded in 1807, John Wiley & Sons is the oldest independent publishing company in
the United States. With offi ces in North America, Europe, Australia and Asia, Wiley is
globally committed to developing and marketing print and electronic products and
services for our customers’ professional and personal knowledge and understanding.
The Wiley Trading series features books by traders who have survived the market’s
ever-changing temperament and have prospered—some by reinventing systems, others
by getting back to basics. Whether a novice trader, professional or somewhere in
between, these books will provide the advice and strategies needed to prosper today
and well into the future.
For a list of available titles, please visit our web site at www.WileyFinance.com.
Volatility-Based
Technical
Analysis
Strategies for Trading
the Invisible
KIRK NORTHINGTON
John Wiley & Sons, Inc.
Copyright © 2009 by Kirk Northington. All rights reserved.
Published by John Wiley & Sons, Inc., Hoboken, New Jersey.
Published simultaneously in Canada.
No part of this publication may be reproduced, stored in a retrieval system, or transmitted in any form or by
any means, electronic, mechanical, photocopying, recording, scanning, or otherwise, except as permitted
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Limit of Liability/Disclaimer of Warranty: While the publisher and author have used their best efforts in
preparing this book, they make no representations or warranties with respect to the accuracy or
completeness of the contents of this book and specifi cally disclaim any implied warranties of
merchantability or fi tness for a particular purpose. No warranty may be created or extended by sales
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Library of Congress Cataloging-in-Publication Data:
Northington, Kirk, 1959–
Volatility-based technical analysis : strategies for trading the invisible / Kirk Northington.
p. cm.—(Wiley trading series)
Includes bibliographical references and index.
ISBN 978-0-470-38754-2 (cloth/website)
1. Investment analysis. 2. Portfolio management. I. Title.
HG4529.N6—75 2009
332.63’2042—dc22
2009007397
Printed in the United States of America.
10 9 8 7 6 5 4 3 2 1
For my wife Faith …
only with her unceasing belief in me
was this book written.

Contents
Preface xiii
Intended Audience xiv
What’s Inside? xiv
Acknowledgments xvii
PART ONE Are You Prepared? 1
CHAPTER 1 The Challenges 3
The Brain Power 4
The Horse Power 6
Options and VaR Ascendancy 7
Rain Clouds or Urine? 10
News Folly 12
Eyes on the Goal 13
CHAPTER 2 The Opportunities 15
Choose Your Battles 16
Take the Off ensive 17
Prepare and Perform 26
Quiet the Noise 29
Opportunities Outnumber Challenges 30
CHAPTER 3 The Foundation: Preparations for Exploring
Volatility-Based Technical Analysis 31
The Preparations Needed 32
Trading the Invisible Indicators: Original Development 33
Tenets of Volatility-Based Technical Analysis 34
vii
viii CONTENTS
Component Testing 40
MetaSwing QuickStart 40
Discover by Doing 51
PART TWO Seeing the Invisible 53
CHAPTER 4 New Volatility Indicator Design 55
Volatility Unmasked 56
Standard Deviation 57
Example: Volatility-Based Support and Resistance 61
Average True Range 66
Molding a Volatility-Based Indicator 69
The Whole Picture 83
Building Blocks 86
CHAPTER 5 Integrated Volatility Indicator Design 87
Volatility Pointed Forward 87
Projected Implied Volatility 90
More from the Math Toolbox 101
Using Tools to Leverage TTI ATR Extreme 107
Development Effi ciency 114
Inventing Wheels: You’re Not Alone 115
Onward 126
CHAPTER 6 The Framework: A Structural Approach for
Cross-Verifi cation 127
Adopting a Structure 128
Think and See Volatility 129
The Framework Components 141
Constructing a Compound Derivative 146
The Framework 156
Going Forward 161
CHAPTER 7 Traditional Technical Analysis: What Works,
What Doesn’t, and Why 162
Line Studies 163
Chart Patterns 173