I like to call it "The Money System

Take what you want from this information. And try figure out what to do with the results ....

1. Find a stock with high liquidity from the DOW/S&P (1million ADV)
2. Ensure the stock in in a decent uptrend (Determine time frame)
3. Compare stock to DOW/S&P Index – Ensure there is an Upward trend correlation

Important to focus on just ONE stock for now.

Once pre requisites are confirmed, proceed to the next step.

1. Calculate the volatility on a daily basis for the stock in “$” terms
2. Convert the “$” terms into a “%” value in relation to the stock
3. Find time base to average the volatility (5,10,15,20 days etc)
4. Check chart for basic S/R level (Consider using different time frames together MTFA)

(#4 will be the key for our “Entry”)
From this information we can gather a few things;

1. We have found a high probability Market (Uptrend)
2. We have a found a high probability stock (3/4 Stocks follow the market)
3. Correlation between the two further confirms this
4. We know how much “$” the stock moves on a daily/weekly/monthly basis
5. We know what this means to the bottom line in % terms

Now we have all the information we need to pursue Proper Risk Management.

1. Consider what our findings of the stocks “volatility” are. Its telling us roughly how much cents/dollars our stock moves on a daily basis.

1. What if we were to multiply this number by 1.5? What would the results tell us? It would give us an anomaly figure. Which means , if the stock were to on any given day move this number or beyond , we would be outside the average, which put simply would imply the stock is currently behaving “outside” its normal behaviour.

 

It should work until it stops working. Do some proper back testing with out of sample data over multiple stock issues and volatility periods. I suspect what you will find is that the periods of time when it starts working and when it stops working are randomly distributed, and that your system has no positive expectancy.

If you at all believe that price movements are random (geometric brownian motion), then analysis of this sort is complete BS, as is all of technical analysis.

 

And if you believe that movements are totally random (very different that believing in a degree of randomness), your circular logic won't allow you to see any possible edge in the markets. Oh well, more strategies for the rest of us.