RIsk Ranges
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That’s the closest think that I come up with.
Because IV is determining the range of the move.
But I don’t know how to incorporate the volume in the formula.
Volume can be incorporated in the trend for example for QQQ is VXN so on tradingview type vxn/QQq or QQq/vxn and you got the trans.
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Subscriber here as well. I’ve been playing with the numbers for weeks now trying to see what I can figure out.
I’m starting to think that volume has nothing, (or at least very), little to do with it. In my stats, I’ve found that the correlation between volume and the real price range is less than statistically significant. I think he may simply be keeping an eye on it, but I can’t imagine where this could appear in the math. I think it could possibly be a purposeful misdirection.I’d love to put our heads together on this if anyone is interested.
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Hi guys and thanks for the replies. I have been doing some more digging and it appears that like you say John, the volume might not be that important. A Cambs Uni study on volumes in the Futures market showed that using volume didn’t lead to better edge. I know from listening to Keith on the daily Macro Show, he highlighted the other day that OVX at 198 allowed him to lower his risk range on WTI Oil that day to $7.24. So this clue shows that it must be a function of the volatility (using VIX, OVX, GVZ etc) and price. I think for individual stocks maybe he uses the IVOL/RVOL discount or premium as taken from the options market.
Using the WTI above, the risk range on 29 Apr was 7.24 to 17.31. and OVX was 194 with WTI opening at 12.08. Maybe that’s all we need. I know Keith plugs the values into an Excel doc for his calcs daily. Not sure how we could incorporate into PRT other than manually update the indicator daily?
I know that Keith also says the ‘Machines’ use 30 day vola as that’s all they care about.
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I am a Hedgeye subscriber as well and have been trying to work out some risk ranges that are more useful for my purposes since the frequency of Real Time Alerts is too high for my objectives. As to the volume question, I believe it is just a validating factor (price up + volume up = bullish, etc.) and may not be used in the actual risk range calculation. Keith recently mentioned specifically that the risk ranges are based on “rescaled range analysis”. You probably know that Keith is a big fan of fractal analysis and Benoit Mandelbrot’s “The Misbehavior of Markets”. Chapter 9 begins a discussion of Edwin Hurst’s work on the Ashwan High damn in Egypt. I dug into this a little further reading about the Hurst Exponent which is an indicator of persistence (or lack thereof) in a trend. Mandelbrot used this concept in analyzing financial instruments. In short, a rescaled range is range divided by standard deviation which would incorporate both price and volatility, but not volume. All that being said, I have not come up with anything useful yet and am continuing to work on this. I came across this forum doing a Google search and wanted to post what little I know about the topic. I also found this link explaining rescaled ranges and the Hurst Exponent which was very helpful. https://blogs.cfainstitute.org/investor/2013/01/30/rescaled-range-analysis-a-method-for-detecting-persistence-randomness-or-mean-reversion-in-financial-markets/ Any other thoughts would be welcome.
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Hedgeye subscriber here. The more I look at this, I get the feeling that its better to start with Donchian channel and apply fractal maths (Hurst Exponent/power law) etc. For example. DC indicator adds subtracts 1 STD to the upper & lower channel depending on price action. We can perhaps add/subtract 1STD along with log(IV) or something to make the numbers come as close to Keith’s range as possible. We can simply follow DC’s +- formula for low volatility bucket, different +- approach for slow volatility and a completely different +- approach for the fuck bucket. A few trail and errors can help; this is not rocket science.
A simple DC with a daily interval of 9 seems to be close to Keith’s Gold daily range. At the end PNL is all that matters. Stick to bull markets, buy at the low end of the range or range breakout and reduce size when the price nibbles at the top end of the range. FYI: Watching the price within the bounds of DC is putting my emotions in check.
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Not sure if that was one of you guys who asked that question on the Macro Show this morning but if that was any one of you, hats off to you. Someone asked, “why does the Risk Range model use durations of 3-something *or more*…, so 3 weeks or more, 3months or more, 3 years or more. Why aren’t the trade, trend, tail numbers static?”
So apparently Keith doesn’t use the same ranges each time, sometimes a trend range is more than 90 days, sometimes it’s “119 days” as he said. And he also reiterated that Hurst exponents are an important factor, as @derrick was saying. Hurst exponents are where I’m currently putting most of my focus.
@grim: At least with the S&P, I know there’s definitely a strong correlation between Keith’s numbers and the VIX, but I have yet to figure out exactly where he fits them into the equation. And that’s a good point about oil, that number can be crazy high but oil’s price would never reflect a change in the 200s.
@p2: I have never heard of Donchian channel but I will look into that as well. Thanks for the heads up on that.1 user thanked author for this post.
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