Friday, October 28, 2016

Jerry Parker on volatility

It's been a while since I read Michael Covel's The Complete Turtle Trader - the story of the famous Turtles experiment with Richard Dennis and William Eckhardt and their band of trend followers in the mid-1980's.

Whenever you read an old favourite after a while you tend to discover some little nugget that you may have previously overlooked. As an example, today I came across the following excerpt featuring quotes from Jerry Parker:

"Jerry Parker found that his best trends often start with very low volatility at the initial breakout entries. He said "If the recent volatility is very low, not $5 in gold, but $2.50 in gold, then we're going to throw in a very large position.

Parker's analysis kept showing that a low 'N' measurement at the time of entry was a good thing. He said "I can have on a really large position. and when volatility is low, it usually means that the market has been dead for a while. Everyone hates the market, has had lots of losers in a row, tight consolidation. And then as it motors through those highs, we get on board.""

Now, as explained in this post I place volatility contraction prior to entry as a key part of my own trading. However, I learned this from reading the likes of Thomas Stridsman, and also the following quote from Paul Tudor Jones' Market Wizards interview:

"The basic premise of the system is that markets move sharply when they move. If there is a sudden range expansion in a market that has been trading narrowly, human nature is to try and fade that price move. When you get a range expansion, the market is sending you a very loud, clear signal that the market is getting ready to move in the direction of that expansion."

While looking at volatility contraction was not part of the original Turtle rules, I found it highly interesting that Jerry Parker picked up on this, and some of the other Turtles recognized this too.

In the original Turtle rules document floating around on the internet, it states that "...if the volatility of a given market was lower, any significant trend would result in a sizeable win because the Turtles would have held more contracts of that lower volatility commodity."

In my own trading, I've taken this basic concept a stage further. Because I place a great deal of emphasis (rightly or wrongly) on measuring volatility, if I deem current price action to be too volatile, then I won't take the trade - indeed, my own scans now include this element as one of the conditions.

This is something that Larry Hite also talked about:

"The fourth thing Mint does to manage risk is track volatility. When the volatility of a market becomes so great that it adversely skews the expected risk/return ratio, we will stop trading that market."

Generally speaking, as I use an Average True Range measurement to determine initial stop placement, then the lower the volatility, the bigger the potential position size while respecting your monetary risk per trade. 

That also means that price has to move a shorter distance in your favour to generate each unit of R profit. Or put another way, the more volatile the stock or instrument at the point of entry, the further price has to move to make each unit of R profit.

It is generally accepted that the ideal market state for a trend follower is a trending (obviously), quiet state. When you enter a new position based on a new high or low being made, you never know if a trend will develop. However, by looking for 'quiet' setups, it means that the inherent level of volatility is currently low. 

By looking to trade markets that are quiet at the intended point of entry, I'm hoping to skew the odds further in my favour, while avoiding the more choppy, volatile setups.


  1. Thanks for these neat pieces of wisdom Steve! I've learned a lot from Jerry Parker over the years. Plus, I'm always encouraged when two or more different smart people independently verify something, based on their own experiences. This volatility compression (low N) at time of entry is a perfect example. Thanks as well for sharing how you're using these principles in your own trading.

  2. What is a unit of R profit? I don't recognize that from the trend following books

    1. Hi Brad - basically 'R' is what you risk on a trade. Say you risk £100 on a trade. If you make a profit of £200, you have made a profit of 2R (2 x £100). 'R' has been popularised by Van Tharp in his books as way of quantifying your profits regardless of monetary value. Go to this post for more: and this one:

  3. Another ah ha moment. What you said steve, its often happen to me. My biggest R profit usually made from a trade that had low volatility at the beginning. Yes, it doesnt need to go to much far to gain huge multiple R for my gain

    1. Yes, looking at the volatility levels on a set up has become a key part of my trade selection criteria. There are some more thoughts here: