Pro Strategy for Trading the Volatility Squeeze

Senior analysts Tyson Clayton and Chris Pulver explain their strategy for trading the trend that follows the volatility squeeze in stocks, forex, and cryptocurrencies. 

Tyson and Chris are the creators of the groundbreaking Equities on Demand training program, which seeks to help you master your equities and options trading game. For more information, watch our Equities on Demand video here.

Reading an instrument’s trend can be a great tool for traders across Forex, stock, and crypto markets. It can help them know which direction the price may likely move in a few simple steps.

Today, we will be talking about one such strategy that uses the price movements and some indicators to help decide the price trend for any asset. The best part? – you can learn and apply it to target potentially profitable trades in just a few minutes. So, let’s get right into it…

The strategy we are talking about is a volatility expansion strategy. The rationale here is that a sudden thrust in the volatility can predict further price movements for an asset. And this helps traders a great deal to position potentially successful trades.

While there are a lot of unknowns within the market, there’s one thing that’s certain which is periods of low volatility have always been followed by expansions of volatility.

Have a look at the image below. All the circles represent periods when the price of JPM witnessed low volatility. But right after these phases, the price saw huge drawdowns or surges representing high volatility or expansion in volatility.

Volatility Expansions After Low Volatility for JPM

Source: MTI, SmartTrader

Take up any stock, currency pair, or crypto for that matter and you’ll notice a similar pattern playing out in all these markets. Phases of low volatility have been followed by expansions of volatility. And this is what we call a volatility squeeze in the market. 

However, the other bit which we don’t know here is if this low volatility or the volatility squeeze is going to be followed by an expansion up or an expansion down.

Here’s the strategy Tyson has developed to trade this situation…

The Master Blaster Indicator

This indicator shows when the markets are likely to explode. It uses a combination of volatility bands along with ratios to flash signs when the markets are set to see volatility expansion.

Here’s how you can trade this situation:

Whenever the indicator flashes volatility expansion, take the average true range or the ATR number of the asset you are trading and multiply it by 75%. The number you now have is how much you could expect the price of the asset to rise or fall. 

The next step is to BUY Calls and Puts at the current price level of the stock and SELL those Calls and Puts at the expected price levels of the stock which you calculated above with the help of ATR.

The target for these trades can be set at 60% of the ATR value.

So, that was one of the historically effective trade setup strategies top analysts Tyson Clayton and Chris Pulver teach in the Equities On Demand Trading Room. For more insights, you can watch this short video where Tyson trades JPM using the Master Blaster Indicator and takes you through the detailed trade setup behind it.

To discover more such strategies, download our FREE ebook and know how you can enhance your trades from demand and supply insights. Click here to download your free copy >>

Trading foreign exchange on margin carries a high level of risk, and may not be suitable for everyone. Past performance is not indicative of future results. The high degree of leverage can work against you as well as for you. Before getting involved in foreign exchange you should carefully consider your personal venture objectives, level of experience, and risk appetite. The possibility exists that you could sustain a loss of some or all of your initial deposit and therefore you should not place funds that you cannot afford to lose. You should be aware of all the risks associated with foreign exchange trading, and seek advice from an independent financial advisor if you have any doubts. The information contained in this web page does not constitute financial advice or a solicitation to buy or sell any Forex contract or securities of any type. MTI will not accept liability for any loss or damage, including without limitation any loss of profit, which may arise directly or indirectly from use of or reliance on such information.

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