Profiting From TradingMarkets: How To Use Kevin Haggerty's Volatility Bands

Last time, we talked about using floor trader's pivots in your trading. This week, I've got more important levels you should be watching: Kevin Haggerty's volatility band levels.

The first question people ask about these bands is: "are they like Bollinger Bands?" The answer is no, not at all.  Volatility bands are based on the implied volatility of the puts and calls of the indices and are static -- good for one day.

We use four standard deviations on each side of the market -- above and below. Statistically speaking, one standard deviation encompasses 68% of the data, which means that if you are hitting a 1.0 vol band, you have a 68% chance of a market reversal at that level. The remaining percentages are: 1.28 band - 80%; 1.50 band - 87%;  2.0 band - 95%.

In TradersWire each day, we post the volatility band levels. These are the numbers from Tuesday September 7:

Volatility Bands
Here are today's volatility band levels for the Nasdaq 100, S&P 500 and PHLX Semiconductor Index:

You can see that the market traded up early to the 1.0 volatility band before backing off. You had a 68% chance of a reversal at this level. Later in the day, the market traded up to the 1.28 band before reversing; here, you had an 80% chance of a market reversal.

This action is fairly common; we see reversals like this take place at volatility band levels frequently. And, like pivots, you don't have to trade futures to benefit from this. You can time your stock trades using the volatility bands. Just make sure that the stock you are trading is either in the S&P 500 or moves substantially with it.

Using volatility bands gives you extra confidence in your trading. You'll know in advance the levels at which reversals are likely.

If you need any help with using volatility bands, please feel free to e-mail me at brice@tradingmarkets.com.

Brice Wightman