Monday, March 22, 2010
VOLATILITY CLUSTERS AND PERSISTS
This is a graph I produced of the daily range of the SP500 Emini futures from July 2002 to the end of last week. The lesson is that volatility clusters and persists. A comparison of 2004-2006 ranges to 2007-2008 ranges clearly shows how the ranges when low, stayed generally low for a couple of years. Likewise, when the ranges began to expand at the end of 2007 through 2008 they tended to continue to stay large for a couple of years. Large ranges and high volatility are a double-edged sword. They can bring large gains but also large losses. The key is to try to understand when the underlying volatility conditions of the market are changing and to modify your trading plan. For example, using different stops or adjusting position sizes.