Strategy Session: Volatility Divergence

Strategy Session: Volatility Divergence

Oct 10, 2005

We’ve got another set-up not found in our Proven Strategies or Samples section that comes to us from a strong advocate and subscriber of Trade-Ideas. Remember that these set-ups are sketches meant to give you an idea how to model your own trading plan. Use this ‘as is’ or modify it to your own liking as many others do.

The Strategy
Volatility Divergence” spots stocks diverging from the sectors to which they belong. It will identify, for example, when Intel begins to behave differently from the Semi-Conductor Index. Depending on whether the divergence is postive or negative, the action could be strong or weak for the stock respectively. The strategy also compares stocks to the S&P Futures. Imagine the Futures heading upwards and the alert window shows a stock that is diverging and headed downwards. This could be a early sign of even more weakness on the stock if the Futures were to roll over and head downward itself. Open up the strategy and click on ‘History’ to see how many alerts get generated on a typical day.

Who Could Benefit
The strategy is ideal for those who trade options based on the strength or weakness of stocks relative to their sectors or indices. It is also good for Momentum traders.

How It’s Modeled
The main feature of the strategy is the series of alerts in our inventory marked as sector breakouts and divergences found here. The other key ingredient is the filter upon which the aforementioned alerts are subject to: the Volatility filter. We set it at $0.15 to minimally ensure that there’s enough movement in the stock every 15 minutes. For a more detailed explanation of this filter, click here.