In my last blog post, Using Historical Volatility for Parameter Adjustment, I tested using historical volatility to determine trade rules. While reading the July 2022 Technical Analysis of Stocks & Commodities, I came across an article, “Is It Too Volatile To Trade?” by Perry Kaufman. I always like his work so I was interested to see what he had to say. He uses standard deviation from the median historical volatility to decide if a stock is too volatile. He points out that even though returns may be positive during volatile times, it comes with higher risk.
From my own research, I frequently use historical volatility (HV) in my strategies. Most of the time focusing on high HV because these are the stocks that are moving. But when I am trying to tame down drawdowns, I change the focus to low HV stocks. Kaufman’s concept is similar but not something I had tried.
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