Extreme Volatility Data Points - Volatility Filters for the E-mini Nasdaq Futures

As algorithmic traders we try to quantify what we are seeing so we can measure it and use it in our trading. This volatility spike cannot be defined by strictly using the VIX since we have seen the VIX trade at these levels before. When markets trade in ways we have never seen, we have to identify and quantify it with data so that we can remove emotional bias. It is not always easy to quantify and measure what you know is "different this time".

We have three charts below to identify what we are seeing in the market that is different this time.

This first plot "Total Points Moved Each Day" is based on measuring the distance traveled for each 100+ point pivot. This indicator requires hindsight and is not used for trading signals but to measure market conditions. On Monday, this value surged way beyond most historical highs by a factor of nearly six. We see spikes above 2,000 point price movements in the E-mini Nasdaq based on 100+ point turning points. On Monday, this number exceeded 12,000. This is $240,000 in price movement in one day, during the day session. The value of one E-mini Nasdaq at 17,500 is $350,000. The price movement intra-day between pivots is about 68% of the entire value of the index. This is by far one of the most extreme numbers we have seen. While there is an extreme amount of opportunity, there is also an extreme amount of risk. Trying to all of a sudden have a day trade algorithm for price action that is this different is nearly impossible. We can, however, recognize it and manage risk by trading small or not at all.

The second chart is one that is familiar and includes the number of 100+ pivot points per day. This is similar to the first chart. The first chart sums up the number of points between each zig zag while this is simply the number of 100+ point zig zags in one day. Based on the number of 100+ point pivots (56) and the number of points moved between each pivot, we calculate the average 100+ point pivot equal 237.5 points with a total of 56 of these moves on Monday, April 7th.

The third chart represents the five-minute ranges in the E-mini Nasdaq each day between 9:30 am - 4:00 pm EST. We posted the average five-minute ranges based on the pre-market earlier today. This shows the five-minute ranges during the day session. We see a spike to extreme levels of nearly 170. This is not just one bar but the average for the day.

This data and research highlight new opportunities in the market for trading strategy development that can be implemented in order to trade new market patterns. It also allows us to quantify new risk management techniques.

Position Sizing If your base unit for trading is one contract, it is difficult to expand stop losses and profit targets. If your base unit for trading is more than one contract, there is an opportunity to decrease position size and expand your stop loss and profit target. In this case we are seeing risk expand by a factor of 6 so strategies with a $3,000 stop loss would need an $18,000 stop loss. For example, instead of trading 6 contracts with a $3,000 stop loss, you would trade, 1 contract with an $18,000 stop loss. In general, for smaller accounts (<$10 million), it is best to pause trading.

We typically increase the number of strategies for diversity of methodology instead of expansion in contracts. When we get "tail risk" or markets that are much different, we pause trading.

Volatility and Regime Changes

One thing about changes in volatility I have noticed over the years is that it can change intra-day patterns in the markets. We typically call this a regime change.