A Study of Volatility, Price, and Backwardation
One of my trading mentors Ted Warren taught me a very simple trading principle. Quiet sideways markets are under accumulation. Wide-swinging high-volume markets are in distribution. Nowadays we call it volatility and have all kinds of fancy mechanisms to measure it.
This principle applies to bitcoin and is a powerful tool for analysis in combination with other tools
Ted Warren - How to Make the Stock Market Make Money for You (1994, Buccaneer Books) 2
Ted Warren - How to Make the Stock Market Make Money for You (1994, Buccaneer Books) 2 Magazine with 308 Pages from…
The above is a must-read for any serious trader. Nothing fancy here, just a humble good old boy with a 6th-grade education whose simple analysis walked all over Wall Street.
Here we will do a cursory study of volatility, price, and backwardation.
I define volatility as the price action relative to the price. There are many ways to calculate volatility, but it is the principle rather than details that is important here. This is what separates analysis from analysis. Ted Warren not only recognized volatility but learned to successfully apply it visually through charts and simple arithmetic calculations.
Looking at a notional bitcoin chart the principle of volatility is readily seen by the wide swings at market tops compared to much more narrow swings at bottoms. The red arrows indicate bitcoin market tops and the green arrows represent bitcoin market bottoms on a monthly scale followed by the same monthly chart on a logarithmic scale. Volatility can not be readily seen in bitcoin on a logarithmic chart.
Yet notional charts are hardly a perfect way to see and understand volatility. This is because as the price rises volatility of bitcoin can actually go down when measured against the prevailing price even though the swings are notionally much wider.
The third chart is the Bitmex Tradingview Volatility Index chart on a monthly scale with the red arrows indicating the Bitcoin tops and green arrows indicating the Bitcoin bottoms. This index was created beginning in January 2017. In December 2022 the Volatility Index hit an all-time low.
A missing chart is one reflecting the BASIS or difference between the spot market and futures. I watch it mentally so don’t need a chart and…