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Rookie Blog: The Ninja Volatility!

November 12, 2020

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Hey All, welcome to another edition of the rookie blog. This week we are talking about volatility and all its wonderful quirks. If you have been watching the markets at all lately you have probably noticed that have been quite crazy and probably for good reason. We have gotten past the election in the US although maybe not as there has been some contentions that things were not done properly. This is not necessarily for us to debate as traders but it does effect the thing that we trade and that is the equity markets. The one thing the markets find most unpalitable is uncertainty and it seems to still be around.

Usually after events such as major elections or things like Brexit and just in general things that have sweeping impacts then one could expect that after the event the volatility would subside and get back to a more normal level because there is usually some kind of resolution. This is not always the case as we have seen from Brexit which is still a thing and now the US election. One may say but Coach Holmes the VIX has fallen so doesn’t that mean that volatility is lower and the answer to that is yes and no?

You see if we are talking strictly about implied volatility then seeing the VIX drop does indicate that the volatility in the markets has come out at least somewhat. Take a look at the chart below to see what happened post-election with the VIX which gives us an indication of implied volatility.

You can see from this chart that in fact the VIX did fall greatly on the 4th of November post election and one could say that implied volatility did shrink. However, if you look at the next chart you may see something else in the mix.

The above chart of the SPY shows that even after November 4th there was still lots of volatility in the markets only it was not implied volatility but it was price volatilty or as I call it the Ninja volatiltiy. What you can see in this chart is alot of price gapping and some candles with ranges that are much larger than the average true range of this equity. This price volatilty can make trading just as challenging as implied volatilty can because of the large price swings that one may not expect.

So be sure to watch out for the Ninja volatility in the future and be sure to practice good trading techniques such as conservative money management and position sizing techniques so that price volatility doesnt damage your account as much as implied volatilty can.

Trade Well,

Coach Holmes

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