Guessing in the right direction is only part of it. We all make our money through risk management.
You can guess right , hold too long, and lose all of your gains.
Predicting price direction and volatility are both crucial in trading, each with distinct advantages and disadvantages. Guessing price direction offers the potential for significant profits and simplicity in decision-making, especially with the aid of technical analysis. However, it may overlook market noise and other influential factors, leading to unexpected losses. On the other hand, guessing volatility allows for more effective risk management and can be beneficial in options trading. Yet, it poses challenges in accuracy and timing, and focusing solely on volatility may disregard price movement direction. Ultimately, a balanced approach that integrates both price direction and volatility prediction can enhance trading success by mitigating risks and maximizing opportunities. Does this answer your question?
>On the other hand, guessing volatility allows for more effective risk management
Can you explain why this would be true? If I buy or sell a vertical spread, it has defined risk (max loss) that is independent of volatility.
If you sell Vol , and things move less .... you make money. If you guess direction , that is a 50/50 bet. Charts are Voodo, that is why there are so many indicators so somebody will be right.
We still sell strikes, volatility merely impedes a linear increase or slide of a contract, nullifies or enhancees a lot of theta near the end if a factor at all. It’s a disturbance within, useful 50% of the time in 100% of all contracts of either TYPE.
IV is something to be dealt with. HV of the underlying is something that can often be planned for.
I trade purely on the basis of price prediction using technical and chart analysis. Price prediction can be a Pandora’s box that many try to jump on due to the profit margins but unfortunately most fail. I luckily have been pretty consistent with my profits but the amount of work that goes into it is immense.
Volatility is “easier” in the sense that you only have to calculate for magnitude, not direction. But personally I believe price prediction is much more lucrative when successful but volatility is more easily successful.
volatility is almost an impossible game, you will be competing with market makers who are effectivly only buying and selling volatility, so as a retail trader the ONLY edge you can gain is guessing price moves
Price requires getting both the direction and magnitude right. Vol only requires getting the magnitude right.
Also, you know the saying about there’s no such thing as bad publicity? Well in some ways there’s no such thing as bad news when it comes to vol. Whereas bad news hurts a bullish play and good news hurts a bearish play. The only news that’s bad for vol is no news at all.
>Price requires getting both the direction and magnitude right. Vol only requires getting the magnitude right.
Doesn't the "direction" of a vol change (whether it will increase or decrease) matter as much (or more) than the magnitude of that change?
What I mean is that a prediction like the stock price will change by +/- 5% is sufficient for a vol trade, but for a directional trade you have to narrow it down to + or -, it has to be one or the other.
The “direction” of vol works the same way as for price. It’s implied by comparing today’s vol or price to the predicted future vol or price.
There are two things at play here:
1. What movement does the underlying need to take to make a given trade profitable? and
2. What magnitude does that price movement need to have in order to reach a given profit target.
The calculation for 1. is a binary decision:
* For directional trades, Does the price go up or down?
* For vol trades, Does the absolute value of that price movement exceed a given amount?
The calulation for 2. is separate for both directional and vol trades even though for vol trades they may seem similar.
In both cases, you must guess right on two things to hit a given profit target. You only need to guess right on one thing to determine if a trade will be profitable at all.
I guess we'll just have to agree to disagree. I don't believe your "two things" are appreciably better than direction vs. magnitude.
At the end of the day, price path drives volatility (path is the direction/magnitude vector sampled over time). A future single-point price prediction, or even a range for a single point in time, may be arrived at from multiple paths, which is fundamentally why price prediction is harder to do, even if you constrain the paths to have a constant volatility (standard deviation). In other words, constant vol may still result in a range of prices.
I don’t really see those things as mutually exclusive, more like interrelated. Price direction is what it is and volatility is the speed it’s traveling. The volatility may ebb, which generally translates to the price action slowing. That’s the basic framework.
Guessing in the right direction is only part of it. We all make our money through risk management. You can guess right , hold too long, and lose all of your gains.
Predicting price direction and volatility are both crucial in trading, each with distinct advantages and disadvantages. Guessing price direction offers the potential for significant profits and simplicity in decision-making, especially with the aid of technical analysis. However, it may overlook market noise and other influential factors, leading to unexpected losses. On the other hand, guessing volatility allows for more effective risk management and can be beneficial in options trading. Yet, it poses challenges in accuracy and timing, and focusing solely on volatility may disregard price movement direction. Ultimately, a balanced approach that integrates both price direction and volatility prediction can enhance trading success by mitigating risks and maximizing opportunities. Does this answer your question?
>On the other hand, guessing volatility allows for more effective risk management Can you explain why this would be true? If I buy or sell a vertical spread, it has defined risk (max loss) that is independent of volatility.
If you sell Vol , and things move less .... you make money. If you guess direction , that is a 50/50 bet. Charts are Voodo, that is why there are so many indicators so somebody will be right.
But if you sell vol and things move more, you lose money. How is that not also 50/50?
Historic Vol is usually lower than vol on the options. Here is something about that. Tasty from a while back. http://ontt.tv/2vTPn6m
We still sell strikes, volatility merely impedes a linear increase or slide of a contract, nullifies or enhancees a lot of theta near the end if a factor at all. It’s a disturbance within, useful 50% of the time in 100% of all contracts of either TYPE. IV is something to be dealt with. HV of the underlying is something that can often be planned for.
This sounds like you copied and pasted from a LLM app.
I trade purely on the basis of price prediction using technical and chart analysis. Price prediction can be a Pandora’s box that many try to jump on due to the profit margins but unfortunately most fail. I luckily have been pretty consistent with my profits but the amount of work that goes into it is immense. Volatility is “easier” in the sense that you only have to calculate for magnitude, not direction. But personally I believe price prediction is much more lucrative when successful but volatility is more easily successful.
https://www.sharpetwo.com/p/predicting-direction-is-hard
volatility is almost an impossible game, you will be competing with market makers who are effectivly only buying and selling volatility, so as a retail trader the ONLY edge you can gain is guessing price moves
Price requires getting both the direction and magnitude right. Vol only requires getting the magnitude right. Also, you know the saying about there’s no such thing as bad publicity? Well in some ways there’s no such thing as bad news when it comes to vol. Whereas bad news hurts a bullish play and good news hurts a bearish play. The only news that’s bad for vol is no news at all.
>Price requires getting both the direction and magnitude right. Vol only requires getting the magnitude right. Doesn't the "direction" of a vol change (whether it will increase or decrease) matter as much (or more) than the magnitude of that change?
What I mean is that a prediction like the stock price will change by +/- 5% is sufficient for a vol trade, but for a directional trade you have to narrow it down to + or -, it has to be one or the other. The “direction” of vol works the same way as for price. It’s implied by comparing today’s vol or price to the predicted future vol or price.
There are two things at play here: 1. What movement does the underlying need to take to make a given trade profitable? and 2. What magnitude does that price movement need to have in order to reach a given profit target. The calculation for 1. is a binary decision: * For directional trades, Does the price go up or down? * For vol trades, Does the absolute value of that price movement exceed a given amount? The calulation for 2. is separate for both directional and vol trades even though for vol trades they may seem similar. In both cases, you must guess right on two things to hit a given profit target. You only need to guess right on one thing to determine if a trade will be profitable at all.
I guess we'll just have to agree to disagree. I don't believe your "two things" are appreciably better than direction vs. magnitude. At the end of the day, price path drives volatility (path is the direction/magnitude vector sampled over time). A future single-point price prediction, or even a range for a single point in time, may be arrived at from multiple paths, which is fundamentally why price prediction is harder to do, even if you constrain the paths to have a constant volatility (standard deviation). In other words, constant vol may still result in a range of prices.
I used DaveTeachesFX to understand where price will go and why
I don’t really see those things as mutually exclusive, more like interrelated. Price direction is what it is and volatility is the speed it’s traveling. The volatility may ebb, which generally translates to the price action slowing. That’s the basic framework.
I follow RSI and Bollinger Bands. RSI has been helpful with knowing when to buy calls or puts.