My sort-of-colleague Joe Weisenthal at The Business Insider blogged yesterday that after a $10 selloff, gold was in a freefall.
A freefall? I admit, $10 might be scary for someone who hasn’t seen it before, but a $10 move in gold is like a 10 cent move in a stock these days.
Many commodity traders use the Average True Range (ATR) to gauge volatility, and more importantly, to calculate position sizes. It’s an indicator that you can get with most free chart services.
The 20-Day ATR for February gold is sitting at $23.40. I look at ATR to describe the personality of the contract: that means a trader can expect the contract to move, on average, approximately $23.40 in any direction. At times, it can be directional. Sometimes it’s just intra-day volatility, ie, the difference between the day’s high and low.
It hurts when it’s against you and feels good when it’s with you. It’s unpredictable and that’s why you use it to create positions sizes that you can sleep with.
I’d concede maybe a $50 or more selloff could constitute a freefall, but it’s a subjective measure.
IMHO, we can see another $40 selloff on the February contracts, and still be in an upward-channeling pattern.
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Well put, Michael! Seems that the neophyte trader/analyst gets caught up in the direction of the move instead of looking at the magnitude. The ATR helps you see the magnitude of the move relative to it’s current history.
Thanks for the note. Joe is a great guy allthesame and I read his work
regularly.