The Hidden Cost of Volatility Drag

Volatility has long been a primary concern in the world of financial markets. Investors have always sought to minimize their exposure to price fluctuations, but some assets offer more attractive returns than others for those willing to take on a bit more risk.

One such asset is crude oil. For decades, crude prices have been closely tied to economic indicators such as GDP growth and inflation rates. However, in recent years, the correlation between oil prices and recessions has become increasingly pronounced. In October 1988, prices jumped from $10 per barrel to nearly $22 per barrel just eight months later, a spike of over 218% in just two years. This pattern suggests that crude oil is not only a reliable indicator of economic activity but also a leading predictor of peaks and troughs in the business cycle.

To capitalize on these opportunities, investors can use various models to identify price shocks and profit from them. One popular approach involves using band triggers to signal potential sell or buy signals based on key levels of volatility. For example, a basic model that uses 9.4% sell and -7.5% buy triggers has produced 11 wins and two losses over the past 21 years, with an average gross gain of 193.39 points per year.

A more advanced model incorporates penetration bands to identify massive blowouts in price movements. By applying these strategies, investors can profit from unexpected spikes in crude oil prices, which are often followed by sharp downturns that offer opportunities for reversal trades. One notable example is the case of lumber, where a basic model with optimized retracement triggers produced four winning trades over nine months, resulting in a gross point gain of 1,431.80 points.

Similarly, soybeans have proven attractive to traders looking to profit from price shocks. By applying various models and strategies, investors can identify potential opportunities for buying or selling and profit accordingly. For instance, the basic cattle model with bands of plus or minus 8.4% produced a gross point gain of Shocking profits in new markets - Commodities - Futures Magazine http://www.futuresmag.com/Issues/2009/December-2009/Pages/Shocking...