Volatility Box Knowledge Base

This page serves as an in-depth guide on how to use the Volatility Box in your trading. As always, feel free to adapt the indicator to your specific style of trading. 

Installation

To install the Volatility Box indicator, you will need to be a subscribed member. If you are not already a member, click here to sign up.

Once you have signed up for an account, you should receive an e-mail providing you with the a link to the downloads page. The username and password that you created at the time of checkout are your login details.

Once you have downloaded today's indicator (.zip file), unzip the file and save the STUDY.TS file on your desktop. In your ThinkOrSwim Platform, import the study by:

1. Click the studies icon
2. Click "Import"
3. Browse to the location where you saved today's new study file
4. Click "Open"
5. Load the study into the current chart

How to Read the Indicator

The Volatility Box indicator displays as a box around price action on your ThinkOrSwim charts. These values plot real-time, as price action is unfolding.

There are 4 key levels that you will see on your charts once you plot the indicator:

1. Cyan Dashed Line - Aggressive entry, represents that price action is moving towards a potential range where price has exhausted historically

2. Inside the Clouds - Conservative entry, represents that price action is moving towards a potential range where price has exhausted historically

3. Outside the Clouds - Stop, price movement outside of this range represents greater-than-usual volatility, and price is acting differently than it has historically, during this hour

4. Gray Dashed Line - Target, the opposing side's gray line represents an exhaustion area, that serves as a good 2nd target for a runner.

The lines and clouds are plotted using the current high and low of the hour, along with the static volatility range values that are calculated using statistical models and machine learning. These values change with the addition of new data every day.

Current Symbols Supported
/ES, /YM, /NQ, /RTY, /ZB, /GC and /CL Futures

We are working on purchasing more data sets to expand the tickers supported.

Easily Identify Periods of Volatility Expansion

Given the additional volatility towards the end of 2018 and the beginning of 2019, knowing when price is doing something it doesn't typically do has become a vital skill in day-trading.

The image to the right shows an example of when the high to low price movement ranging is exceeding what it typically tends to stay in between 68% of the time (binomial distribution). These ranges often time are broken by an infamous tweet, news event, report, etc.

During periods of intra-day volatility expansion, it's important to not only recognize that it's occurring, but also make appropriate trade decisions as a result of it (which may even be to sit back, watch, and not trade). Knowing when to sit on your hands vs. knowing when to get aggressive is an important skill that most traders lack, and the clouds help you identify just that, at a quick glance. 

Setups & Strategies

Choppy Market Fade Fade

Learn More

Trend Follow Trend

Learn More

News & Event Fades Fade

Learn More

Morning Volatility Info

Learn More

Choppy Market Fades Fade

This setup is ideal for markets that are trading sideways. The idea behind this setup is to fade the market whenever it reaches towards the exhaustion point of its normal hourly price movement.

The first such exhaustion point is represented by the cyan dashed line. With no clear trend in play, the trader is fading the current edge of the price movement, looking for a retracement move of at least total dollars risked in the reverse direction, trailing stops until the optional target line (gray-dashed line).

The trader can play these ping-pong moves back and forth, between the price movement range. A more cautious trader could wait for an entry near the beginning of the orange or green clouds, instead of the cyan dashed line.

Entry

Aggressive: Cyan Dashed Line
Conservative: Beginning of Clouds

Target

First Target: Capital Risked on Trade
Second Target: Gray Dashed Line (Home Run Target)

Stop

Few ticks outside of the clouds

Other Useful Indicators

VWAP, Bollinger Bands, Keltner/ATR Channels

Trend Follow Trades Trend

This setup is ideal for markets that are trending strongly in one direction. Fading these markets is akin to swimming upstream - unnecessarily difficult. In such markets, it's best to buy pullbacks, but to buy them when price has exhausted, getting the best price possible.

The first such exhaustion point is represented by the cyan dashed line. With a clear trend in play, the trader is looking to participate by trading in the same direction as the overall trend. With multiple contracts, the trader can scale out at taking profits at 3 levels: total points risked on trade, gray dashed Home Run Target line and a 1.272% extension of a previous, bigger move.

The trader can keep buying pullbacks into the price movement ranges. In a scenario where a trader has taken more than 3 contracts, letting the last one ride with a trailing stop has shown to be a profitable strategy.

Entry

Aggressive: Cyan Dashed Line
Conservative: Beginning of Clouds

Target

First Target: Capital Risked on Trade
Second Target: Gray Dashed Line (Home Run Target)
Third Target: 1.272 Extension Beyond Home Run Target

Stop

Few ticks outside of the clouds

Other Useful Indicators

Moving averages, GRaB Candles, MACD, TTM_Squeeze

News & Event Fade Trades Fade

This setup is ideal for markets that have an upcoming weekly report, or there has been an event that has triggered a sudden burst of volatility, that you consider to be an overreaction (i.e. tweets). The trader is looking to fade this burst of sudden volatility. It is generally best to use the conservative volatility box for these types of news fades.

With such a setup, it is usually in the best interest of the trader to stick with conservative risk parameters, since the move has a greater than usual probability of expanding the price ranges. A trader can take an entry anywhere from the cyan line to the end of the orange and green clouds, looking to take profits quickly. These moves tend to reverse and whipsaw traders often, so it's wise to take profits when it makes sense to do so (when you've received at least your capital risked back, or reversed to the mean).

The trader's stop should be outside of the clouds, with a tight leash. This trade is generally risky, but has a better than usual risk:reward ratio.

Entry

Aggressive: Cyan Dashed Line
Conservative: In the Clouds

Target

First Target: Capital Risked on Trade
Second Target: Reversion to Relevant Moving Average
Third Target: Opposing Target Line (Gray Dashed Line)

Stop

Few ticks outside of the clouds

Other Useful Indicators

Previous support/resistance, Anchored VWAP

Morning Volatility Heads Up Info

If price action during the clearing range (9:30-10:00 EST) exceeds the aggressive volatility box, or even breaches the clouds, this lets the trader know to expect a greater-than-usual price movement range day. Having this kind of information 30 minutes after the market opens is huge.

The trader now knows to expect more volatility for the rest of the trading day. The trader can now use this information to do a handful of things:

1. Use ONLY the conservative Volatility Box for the remainder of the day
2. Look to leverage option strategies to define risk instead of futures (directional or vol. strategies)
3. Sit the day out and protect capital

Clearing Range Period

9:30 - 10:00 AM EST 

Cautionary Signs

Looking for price to breach into the clouds during the Clearing Range

Other Useful Indicators

Moving Averages

Trade Examples

DOW Futures - April 12, 2019 Fade

On April 12, the DOW had a gorgeous fade setup present itself, with the VWAP (purple line) overlapping with the Volatility Box entry line (cyan dashed line). A confluence of setups gives us more confidence in this particular setup.
Entries: We had an opportunity to park our limited orders at both 26,329 (aggressive) and 26,312 (conservative)
Stop: Right outside of the clouds at 26,285
Targets: Initial target of 27 points (26,312 - 26,285) and second target of 26,389 (target line).

This was a straightforward trade that resulted in a profit of at least +$135.


/YM Futures - 4/12/19

DOW Futures - April 16, 2019 Fade

On April 16, the DOW presented a short opportunity with a slight overlap with the VWAP. The Volatility Box had a better entry, and this got us into the trade. We then proceeded to have a catalyst in UNH news that caused the DOW to plummet lower, and then give us our second news fade setup to play the overreaction.

Entries: 26,464
Stop: Right outside of the clouds at 26,510
Targets: Initial target of 46 points (26,510 - 26,464) and second target of 26,416 (target line).

Immediately after this trade targeted out, there was another entry to go long and capture another 65 points into the close.


/YM Futures - April 16, 2019

ES Futures - April 12, 2019 Fade

On April 12, the ES was caught in the middle of a tug of war in between the Nasdaq and DOW. This led to a royal setup in fading the price action at the Volatility Box entry line.

Entries: Limit Order @ 2904
Stop: Outside of the Clouds @ 2899.75
Targets: Initial Target of 4.25 pts (2904 - 2899.75) and Secondary Target of 2911 (both hit).

This was a straightforward trade that resulted in a profit of at least +$212.50.

/ES Futures - April 12, 2019

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