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Why do Indexes lose volatility?

  1. I would like to understand why Indexes like ES lose their volatility at some point in time.

    Any expert in here that can provide sound reasons as of why indexes become less volatile and more difficult to trade?

    Do they become more efficient?

    Right now ER2 and NQ seem to be the hot futures indexes to trade. I am sure at some point in time either of them will become less attractive and perhaps YM will become the hottest thing.

    Why does this happen?
  2. I dont think the YM will ever be the "hot market" to trade.
  3. Thanks for replying. If you read my post, i clearly stated YM as an example.

    Do you have anything more insighftul other than saying YM won't ever be the hot thing?
  4. PPT. Volatility will come back someday, but nobody knows when before it happens.
  5. Maybe when computers trading against computers is banned...volatility will return...
  6. I agree with you ES. Futhermore, before the battle of the bots began, markets were expanding and contracting. It's to be expected. Can't complain about today's volatility.
  7. i believe low commissions are part of it. if you can have traders flipping for a tick all day and still make a profit they will do just that and kill volatility in the process
  8. Thanks to all those who stepped in and left a comment.

    Thus far we have two valid arguments supporting drops in volatility in certain instruments:

    1. Computer programming, i.e. automated trading systems that make markets more efficient

    2. Trading is accessable to almost anyone nowadays, and there is a particular category of traders, called SCALPERS, who kill each other for a couple of ticks and cause markets to be stuck in tight ranges.

    Is there anyone out there who can either add to or expand on the above points?

    For instance, ES used to be a very good instrument to trade and had wonderful volatility before turning dull in 2001-2002.

    Then, ER2 picked up on volatility and became the best replacement for ES in terms of price swings and price action.

    Recently NQ's minimum tick was adjusted from .50 to .25, hence doubling up its daily number of ticks.

    Right now ER2 and NQ are the best trading instruments in the US in terms of volatility.

    Europe offers an even more volatile instrument, the DAX.

    Has ES become scalpers' favorite trading instrument?
  9. Do you have something tangible with respect to this statement? Something more empirical?

    Market participants are always attempting to find value - the more inclined the longer terms participants are in acting out (i.e. trading) their perception of value, the better range extensions and market moves we will have. I'm not sure what you're trying to imply with your comment ~ are you asking at what point will people want to just stop participating in the ES auction? My answer: 1. Who cares? 2. Likely never. 3. The ES is an intangible product, just like the YM, ER, NQ etc etc... so it doesn't matter what the product represents (if anything at all) as long as there are people willing to participate.

    EDIT: You are ignoring the price/volume ratio. Keep in mind you can throw pretty much any volume you want at the ES - not so with other SIFs...
  10. Yes, I do have something empirical...just took it for granted that almost everyone in here knew that ES's volatility dramatically collapsed since 2002.

    Avg daily range in 2000 was in the 30s, in 2001 between 20 and 30, same with 2002.

    And here is the empirical proof volatility dropped: since the second half of 2003 ES has been averaging between 10 to 15 pts per day.

    From 30 pts per day to 10 pts per day is a major drop in volatility.

    Basically ES is moving within a range 3 times tighter as opposed to 5-6 years ago.

    The interesting thing, as you hinted in your post, is that since the second half of 2002 volume more than doubled, averaging well above 1m contracts per day nowadays. This certainly makes it the most liquid of all indexes.

    The scope of this thread is on volatatility and what makes markets like ES less volatile and more liquid.

    Why does that happen?
  11. And to answer your questions, I am not trying to understand why people lose interest in a certain instrument.

    In fact, I pointed out how ES dropped in volatility yet it more than doubled its daily volume.

    ES clearly become more popular and more interesting, more traders have joined it yet its volatility has made less it attractive to my trading style.

    Of course, it depends on what your trading style is. If you are a position trader, ES might be a good instrument.

    If you are a daytrader, I believe there are better instruments out there to trade such as ER2, NQ and even YM, which averages about 100 ticks per day.

    Volatility creates opportunities, and opportunities usually lead to money.
  12. Where do you guys get the actual volatility for "futures" from?
    I would like to have the actual numbers for the YM, ES etc.

    VIX is the S&P 500 30 day volatility and therefore not really useful for me.

    Thanks Max
  13. as the volatility decreases make your size larger to experience larger profit

    as other people do this, volatility gets back

    oh the cycles, the never ending cycles

    drive me mad them cycles

    god damn cycles :D :D :D :D :D :D
  14. If you want volatatility trade google............over 900 tick range today
  15. I think you may have the answer to your question right there... in these futures markets that you are looking at, let's see how they operate:
    ES - most volume, tighter ranges recently
    NQ - good volume, ranges better than ES (but can be worth less in terms of $$$)
    YM - ok/weak volume and at $5/point not that profitable
    ER2 - the crazy one of the group - decent volume and very 'jumpy'. This 'jumpiness' however can provide very profitable moves if you are correct.

    At first glance, one could argue that TOO much volume can dry up the volatility and daily ranges. Someone else pointed out though you can do much more volume on the ES, so if you trade 50, 75, or 100 contracts at a time, the ES is basically the only e-mini futures market to do this at.

    I'd recommend you also look at:
    EC/6E (Euro FX full size contract) - volume comparable to the ER2, but at $12.50/tick you do not need huge ranges although we do see nice ranges and volatility there as well.
    QM (Crude Oil miNY) - lower volume, but at $12.50/tick this thing can provide tremendous volatility.
  16. The tick size of ES is too wide making it relatively unattractive for intraday traders. A smaller tick allows for a better risk/reward on the intraday. As a result the ER2 and NQ are more popular.

    The YM was hampered by not allowing native stops making it difficult to catch breakouts or pivot break stops without a lot of slippage making for unattractive intraday risk/reward. Perhaps the CME will correct this with the merger - the way the Dow has been moving this index should be the most attractive for intraday traders if not for the handicap.

    Intraday volatility in the equity indexes seems to go where traders get a better deal on risk/reward - tick size & native stops.
  17. I suggest you first indicate what type of volatility you are looking for.

    As a daytrader, I measure volatility in terms of # of ticks per day. That's all that matters to me.

    I am sure this would change if I were a swing trader.

    How would you like to measure volatility?
  18. Here is how I measure daily volatility of US indices:

    - setup a daily chart with ATR (21)

    - multiply ATR # by # of ticks per point

    - total # of ticks provides you with daily volatility

    Let's look at how US indices compare with each other:

    ER2: 11 * 10 = 110 ticks per day
    Volume MA (100): 174K
    Tick value: $10

    NQ: 23 * 4 = 92 ticks per day
    Volume MA (100): 309K
    Tick value: $5

    YM: 88 * 1 = 88 ticks per day
    Volume MA (100): 98K
    Tick value: $5

    ES: 10 * 4 = 40 ticks per day
    Volume MA (100): 1M
    Tick value: $12.50

    EURFX: 75 * 1 = 75 ticks per day
    Volume MA (100): 135K
    Tick value: $12.50

    As you can see above, ER2 is the most volatile index of all, followed by NQ and YM. ES is almost 3 times less volatile as ER2.

    ES is by far the most liquid market of all, averaging slightly above 1 million contracts exchanged per day. It looks like its drop in volatility and rise in volume in recent years explain how ES has probably become the ideal market for scalpers and large institution funds.

    As to tick value, ES and EURFX have the highest with $12.50, followed by ER2 with $10. YM and NQ rank last with $5 per tick.

    In conclusion, for daytraders with a capital greater than $50K, ER2 looks like the best market to trade in terms of volatility, tick value and volume.

    I personally don't feel ready to trade at a $10 per tick clip, hence a good compromise definetely is NQ, which offers good volatility and better volume than ER2.

    YM is the same as NQ, only difference being liquidity, which could cause some slippage if you trade more than 10 contracts at the time.

    On separate note, EURFX does offer decent volatility and good liquidity....the only problem being that currencies trade 24hr...thus, that volatility is distributed over a 24hr span...

    I dont think EURFX is a good market for daytraders. I think it's great for swing trading, same for ES.
  19. Daily range for SPX '64-'06. Has been down before, then came back up. Is it different this time?
  20. Interesting chart. It looks like volatility is doomed to pick up at some point.
  21. Apologies that my post wasn't complete. I'm basically looking for the historical volatility based on historical data. Something like:

    Let the continous compounded return be:

    u = ln ( S(i) / S(i-1) )

    where S is the stock price and i is the interval.

    I'm looking for the following:

    Stdev = sqrt ( (1/n-1) * Sum ( u(i) - u(mean)^2 )

    Or in other words: Seeking Stdev based on countinous compounded returns for the YM, ES, ER2, etc...

  22. I am not a math guy so I can't nor am I interested to understand the above formula.

    Perhaps you should look elsewhere within ET to find your answers as I see you are very math-oriented.

  23. "Right now ER2 and NQ seem to be the hot futures indexes to trade. I am sure at some point in time either of them will become less attractive and perhaps YM will become the hottest thing."

    your post is based on the assumption that volatility in the indexes makes them better to trade.

    this is not necessarily true. it just requires different methodology to trade low volatility environment vs. hi volatility environment.

    the latter, for example, works better with "breakout strategies", trend following, and larger stops.

    none of which i am particularly fond of, myself.

    the key is finding a market that suits your personality, and knowing which setups to use in which market environment.

    volatile is not necessarily better

    looking over my stats the last 2 months, the vast majority of my trades are 'fade' variety

    that tends not to be good strategy in a volatile and/or trending market.

    but the market i trade has not been either very often, especially on an intraday basis.

    one thing about the YM is that it has the best spread. it is also not infected by arcade traders, like the ES, which imo gives it smoother, more tradeable moves.
  24. Volatility declines when risk concerns decline... complacency. Also, there are derivatives players can buy for a hedge so they don't have to sell stocks.

    When volatility returns, I believe it will be temporary. Then, the trend toward lower volatility will resume.... and will progress to even lower volatility still.

    Eventually, the volatility will approach zero. At that time, only automated black boxes will be trading... scalping for ticks... fastest gun wins.

    It will be like a gigantic, worldwide game of financial Slap Jack! Hahahaha :D
  25. Agree with you. ES is not the best market unless you are trading a very large account and need to move size. Most smaller daytraders would do better in a more volatile market. IMHO

  26. When markets (ER2) are going up usually VIX goes down.
    When markets (ER2) go down usuallu VIX goes up.
    This indicates volatility in markets.

    When markets (NQ) are going up usually VNX goes down.
    When markets (NQ) go down usuallu VNX goes up.

  27. You make a good point. Different markets for different trading styles.

    In fact, this post was aimed at understanding why volatile indexes lose their volatility. Like ES.

    Why do you think YM has the best spread? Isnt't its spread 1 point - one tick - like all other markets?

    Isn't the spread for ER2 .10? Isn't the spread for NQ .25?

    Spreads all look the same to me. Am I missing something?
  28. yes, you are missing something about the spread.

    the minimum spread is ALWAYS 1 tick.

    it can be more, but never less

    the issue is what is the tick size in relation to the average true range. this increases your ability to get in at a better price, and get out with yer target.

    the ES is at the 1400 area

    the YM is in the 12,200 area

    generally speaking, when the ES moves 1 point, the YM moves 8-10 points.

    the tick in the ES is 1/4 point

    the tick in the YM is 1 point

    so, in a 8-9 point YM move, there are 8-9 different exit/entry points

    in an equivalent move on the ES, which is 1 point, there are only 4 exit entry points.

    roughly speaking, the YM has TWICE as good (a little bit more actually) spread as the ES.

    that ALONE, makes the YM a vastly superior instrument, depending on yer timeframe.

    if you are trading 3 week swing trades, the tick size difference is mostly insignificant.

    if you are making multiple trades per day, it is VERY significant.

    here are the last 20 days daily range

    the average ES range is 9.49 points
    the average YM range is 83 points

    the last 10 days

    the average ES range is 9.4
    the average YM range is 84

    this kind of stuff is CRITICAL to trading success. if you are a scalper, it is incredibly important.

    imo, the YM is superior for a # of other reasons, but this is just basic stuff here.
  29. to get even more specific.

    if you have a target 8 points away from yer entry, and the YM moves 9 , you are GUARANTEED to meet your target

    in a 1 pt ES move (4 ticks) the ES has to move FIVE points for you to get your guaranteed exit on the 4th tick

    again, i use limit orders and can often get out without the price moving through my target, but u can see again why spread is CRITICAL.