With my investment strategy I set a stop loss based on volatility. I can't seem to find an accurate method to predict the following days volatility. I tried using standard deviation to no avail. Anyone have any other suggestions?
The big boys use stochastic models such as Heston and it's many permuations for this. You're opening a huge can of worms here, because if I could easily and accurately forecast tomorrow's volatility, I would be off buying or selling straddles right now. I would recommend either Hull, Sinclair, or Bennett's book(s) for more information on this topic. Definitely a cool question though.
Our poster is probably looking for a simpler solution. Implied vol is the best predictor. You can calculate an expected move like so: price $323.62 x iv 31.6% x square root of days to expiration divided by calendar year SQRT (22/365) = $25.11 expected move. Another method is Garch. Essentially, is a moving average of volatility. ( I think it uses variance.) If you want something more basic and accessible, I wouldn't pooh pooh ATR (Average True Range). The pros still use them for stops on the underlying. I have read an article that says ATR is more effecive than Standard deviation, but never did the backtest myself. Take it for what it's worth on the internet.
The VIX(fear index) is an index, a technical indicator and a security you can trade all in one. It is arguably the best gauge of risk and sentiment available to the investing public and can be used effectively by any trader within any market.
%%%%%%%%%%%%%%%%%%%%% One big help is to realize its not really about prediction, especially the ''following days vol.....'' But past 20 days ;could give some hints.............................................................................................................................Frankly if someone could exactly predict the following days.....then it would easy to own all the world. SEPT does tend come up flat or down a bit;NOT a prediction.
I should have phrased my post a little differently. What I need to know is more the current volatility or even the past weeks volatility.
Quick correction: Good post regarding VIX, but please note that VIX is not tradable. VX futures and options are tradable, but anyone who's done any of that knows that they have some differences. Also, although he doesn't say what assets he's trading, note that VIX is merely a kernel smoothing technique applied to options on the S&P (or, just the volatility of a variance swap, if you prefer) so although they may or may not be suitably correlated, you can't outright assume that VIX tells you your implied vol for any particular asset besides SPX, etc. OP, if you are in fact trading just the SPX (or a few other major indexes), there a number of listed products to hedge your concerns about tomorrow's volatility which might make your life simpler.
I'm actually trading ETFs. I have a list of all ETFs and I import data on all of them every week. I came up with a ranking strategy that ranks these ETFs with a series of column sorts. I do this every week and trade my top 4 prospects. I also use stop losses. This is what I need the volatility index for.