In place of analysis today I thought i'd briefly explain the essential nature of volatility as i see it. There are two causes of volatility

1. Volatility produced by normal market dynamics i.e. consequences of regular speculative activity (compression and expansion)

2. External factors i.e. developments in the real world, news, war, economic data (like growth, unemployment etc) that updates the market.

 

If you look around there will be various other explanations floating around as possible sources of volatility. If you consider any of these alternative ideas you will find in the end it is either a consequence of normal market dynamics or an external event. These alternatives include

1. Market physics (things in motion stay in emotion) included in group 1 normal market dynamics.

2. Psychology and Sentiment included in group 2 external factors and how its digested by the market participants through their psychology.

3. Large volume. Says nothing about why there is large volume. Almost certainly in group 2 external factors.

4. Statistical Patterns. Reveals relationships between occurrences and environments doesn't suggest why such a relationship exists. The relationship causally is due to compression and expansion OR external factors and the regularity or predictability of how 'new' information is handled by the market.

5. Market Structure and liquidity. Order flow dynamics; looking at where traders line up to execute. Again included in group 1 normal market dynamics.

 

It might have occured to some people that the s-wave intrinsically tracks volatility produced through normal market behaviour and ignores the effects external factors might have on the situation. This is true and is my preference in terms of finding a safe foothold in the market. However, the idea I've always pushed is to align the s-wave with larger broader moves which, in the final analysis is caused by group 2 external factors that are delayed or stretched through time.

 

Good Trading.