Strategy of trading on volatility compression by Fibonacci levels
This trading system is based on volatility properties and Fibonacci levels as technical analysis. It has been noticed for a long time that the price corridor is narrowing before a strong movement. It’s especially noticeable before the big news comes out. The activity of market participants decreases, and large volumes of orders accumulate at the range boundaries. When one of the borders is broken through, the volatility increases sharply and the price, like a spring, dynamically rushes in the chosen direction.
In this system, at the boundaries of the narrowest price range relative to a certain period of time, pending buy and sell orders are set. Buy Stop orders are placed at the maximum of the flat, and Sell Stop orders are placed at the minimum. Stop loss is set on the opposite side of the range. The Fibonacci grid, stretched relative to the flute range, is used to determine profit levels
The strategy uses several indicators. Primary indicator Volatility_v3. This indicator uses colored rectangles to highlight volatility zones, compression zones and flute expansion zones. The iPeriod_v3 indicator shows the volatility limits and pending order placement levels. The iFractals_v2 indicator shows possible pivot points
Grey rectangles mark the zones of volatile movement. Green rectangle – compression zone. The blue color indicates the level of the Buy Stop order, and the red color indicates the level of the Sell Stop order
In this figure, the indicator shows the red area of the volatility expansion.
There are 3 main behavior of the price and market participants. The first is the breakthrough of the volatile price range and acceleration. The second is the breakthrough of the price range of volatility compression. And the third is the expansion of the flat of the compression price range before the volatile movement. In all cases, the iPeriod_v3 indicator shows where to place pending orders. After the order is triggered, when it reaches the level of 0.618, part of the volume is closed, and then the Take Profit is set at the level of 1.618 and trailing stop. These levels may vary depending on the width of the flute.
This strategy works on all timeframes. Channels and trend indicators can be used to increase its efficiency.