Verifying Historical Volatility Calculation

              
This article was written for you, Bryan.

Since you brought up the question of whether volatility is an arbitrary value in your comment on my previous article, I've been curious to find out if I am still half as good as I was a few years back :) .  Since most of the files I did last time were lost, I spent many hours trying to find and finally managed to dig out an annualized 30 day historical volatility of KLCI from 2001-2006 that I've downloaded from Bloomberg (industry standard other than Reuters) last time.

The first thing I did was to plug-in the KLCI index value into the Excel that I've created to calculate the volatility of FCPO and put Bloomberg's data side by side to compare.  Then I tried to find the period that has been used by Bloomberg to calculate the annualized 30 day historical volatility. 

After a few trial and error, I managed to get the same exact value of KLCI's annualized 30 day historical volatility value with Bloomberg.  Bloomberg uses 260 days instead of 252 trading days in a year.

As usual, the screen capture is as below:

Cheers & Happy trading!
                                          

FCPO Volatility Measurement

         
Since I've heard a lot of people talking about how hard it is to trade our FCPO these days because of the high volatility, I've decided to do some facts checking of my own.  To have our own view in the ocean of opinions surrounding us every day that could influence and cloud our judgment is the first step towards becoming a good systems developer.

Since every subjective statement is relative, I've written a simple Excel spreadsheet to measure and compare FCPO's volatility since end of 2006 until first week of July 2010 and see if it is true that recent volatility is higher than average between this period.

Since most of the trend-following systems are using daily data, I've decided to use the daily closing price (unadjusted though) to measure the annualized monthly volatility.  I don't wish to go into the detail definition of volatility measurement as you can easily google and read them.  Okay, okay, I know you are lazy, here's a quick definition I copied from Wikipedia : Volatility refers to the standard deviation of the continuously compounded returns of a financial instrument within a specific time horizon.

As usual, a picture is worth more than a thousand words...

As usual, surprise!  FCPO's volatility recently is the lowest in about 4 years that I've measured!
              
If you believe that low volatility means that market tends to be in cycles more than trend, then naturally a trend-following system would be going through the usual drawdown, how bad the drawdown is just a function of balance between risk and reward that you choose. 

As usual, too aggressive and you'll have higher probability of reaching maximum drawdown that you are able to stomach, too conservative and the return may not justify trading in futures market.  Again as usual, there is no one size fit all solution because everyone is different!  That is why trading is always challenging and interesting!   Cheers & Happy trading!