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Does price continue or reverse when volatility spikes? Read more to find out...

Updated: Feb 14

If you’ve been a keen observer of the market, you must’ve seen large price changes being followed by large moves and small movements are followed by small price changes. The direction of the move isn’t considered here, only the magnitude. This is called Volatility Clustering.


But today, let’s consider the direction. By simple using the Open and Close EoD prices, we’ll see what way the price moves after a large vol movement in the market.


Trade Set Up for Scenario #1 –

This scenario considers Price Reversal, i.e., long price moves in one direction followed by large price moves in the opposite direction.


Long Trades: Open > Close and it is a big move Short Trades: Open < Close and it is a big move

Exit after ‘n’ days.


Now, if you keep on changing the number of days for Exit –


Case #A – Exit after 3 days



Case #B – Exit after 4 days


Case #C – Exit after 5 days



Case #D – Exit after 6 days




Here is the comparison of all the above cases:


Trade Set Up for Scenario #2 –

This scenario considers Price Continuation, i.e., long price moves in one direction followed by large price moves in the same direction.


Long Trades: Open < Close and it is a big move Short Trades: Open > Close and it is a big move Exit after ‘n’ days.


Case #A – Exit after 3 days




Case #B – Exit after 4 days



Case #C – Exit after 5 days



Case #D – Exit after 6 days





Conclusion -


In India, we do see Volatility Clustering and the price drift is in the direction of the move (price continuation) and not contra moves (price reversal)


Do you want to backtest your trading logic? Or need help with universe selection? Write to us at contact@arque.tech with your query or call/Whatsapp on +91-9321136466