VOLATILITY

ILLUMINATED

Mark Whistler
 ark Whistler is a trader, author and analyst.
Whistler has appeared on CNBC and is a
regular contributor to FXStreet.com,
discussing currency trading and global
markets.
Whistler is also a contributing Senior Market
Strategist toTradingMarkets.com.
His books include 2034 The Corporation
Post 2012 (CreateSpace, 2009), The Swing Trader's Bible (John Wiley
& Sons, Inc.) - co-authored with CNBC/Fox News regular guest Matt
McCall, Trade With Passion and Purpose (John Wiley & Sons, Inc.
2007), Trading Pairs (Wiley, 2004), Profit from China (Investment
U/Wiley, 2006) and Profit from Uranium (Investment U/Wiley,
2006.)
Mark Whistler is also the founder of WallStreetRockStar.com,
fxVolatilty.com and InstitutionalIndexResearch.com. Whistler is also
a regular columnist for Investopedia.com. In his spare time, Mr.
Whistler operates Eats For The Streets, a growing organization -
dedicated to helping homeless across America and the
MarkWhistlerGallery.com , an unbiased Internet art gallery open to
all artists (globally) seeking to display their works.
Volatility Illuminated by Mark Whistler
Copyright © 2009 Mark Whistler - All rights reserved.
Media@ fxVolatility.com
www.fxVolatility.com.com
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will most likely be granted by the Author upon request, as he believes in Capitalism and that free
markets provide opportunity. The author requests permission queries be addressed to:
[email protected].
Limit of Liability/Disclaimer of Warranty: While the author has used his best efforts in preparing
this book, he makes no representations or warranties with respect to the accuracy or
completeness of the contents of this book and specifically disclaims any implied warranties of
merchantability or fitness for a particular purpose. No warranty may be created or extended by
sales representatives or written sales materials. The information contained herein may not be
suitable to be taken as empirical truth. You should consult with a professional when and where
appropriate. Neither the author, the editor, nor the publisher shall be liable for any personal, or
commercial damages, including but not limited to special, incidental, consequential, or other
damages.
Library of Congress Cataloging-in-Publication Data:
ISBN 1441490795 EAN-13 X 9781441490797
Printed in the United States of America, New York, New York
First Edition June 2009/First Printing June 2009
 Limit of Liability/Disclaimer
of Warranty (EXTENDED)
PairsTrader.com, Inc. LLC, [WallStreetRockStar.com, FXVolatility.com and Mark
Whistler] ("Company") is not an investment advisory service, nor a registered
investment advisor or broker-dealer and does not purport to tell or suggest which
securities or currencies customers should buy or sell for themselves. The principals,
analysts and employees or affiliates of Company may hold positions in the stocks,
currencies and/or industries discussed here.
You understand and acknowledge that there is a very high degree of risk involved
in trading securities and/or currencies.
The Company, the authors, the publisher, and all affiliates of Company assume no
responsibility or liability for your trading and investment results. Factual statements on
the Company's website, or in its publications, are made as of the date stated and are
subject to change without notice. It should not be assumed that the methods, techniques,
or indicators presented in these products will be profitable or that they will not result in
losses. Past results of any individual trader or trading system published by Company
are not indicative of future returns by that trader or system, and are not indicative of
future returns which be realized by you.
In addition, the indicators, strategies, columns, articles and all other features of
Company's products (collectively, the "Information") are provided for informational and
educational purposes only and should not be construed as investment advice.
Examples presented on Company's website are for educational purposes only. Such
setups are not solicitations of any order to buy or sell. Accordingly, you should not rely
solely on the Information in making any investment. Rather, you should use the
Information only as a starting point for doing additional independent research in order
to allow you to form your own opinion regarding investments. You should always
check with your licensed financial advisor and tax advisor to determine the suitability of
any investment.
HYPOTHETICAL OR SIMULATED PERFORMANCE RESULTS HAVE CERTAIN
INHERENT LIMITATIONS. UNLIKE AN ACTUAL PERFORMANCE RECORD,
SIMULATED RESULTS DO NOT REPRESENT ACTUAL TRADING AND MAY NOT
BE IMPACTED BY BROKERAGE AND OTHER SLIPPAGE FEES. ALSO, SINCE THE
TRADES HAVE NOT ACTUALLY BEEN EXECUTED, THE RESULTS MAY HAVE
UNDER- OR OVERCOMPENSATED FOR THE IMPACT, IF ANY, OF CERTAIN
MARKET FACTORS, SUCH AS LACK OF LIQUIDITY. SIMULATED TRADING
PROGRAMS IN GENERAL ARE ALSO SUBJECT TO THE FACT THAT THEY ARE
DESIGNED WITH THE BENEFIT OF HINDSIGHT. NO REPRESENTATION IS BEING
MADE THAT ANY ACCOUNT WILL OR IS LIKELY TO ACHIEVE PROFITS OR
LOSSES SIMILAR TO THOSE SHOWN.

ADDITIONAL NOTICE TO
FOREX/CURRENCY TRADERS
Trading foreign exchange on margin carries a high level of risk and
may not be suitable for all investors. The high degree of leverage can work
against you as well as for you. Before deciding to trade foreign exchange,
you should carefully consider your investment objectives, level of
experience and risk appetite. The possibility exists that you could sustain
a loss of some or all of your initial investment and therefore you should
not invest money that you cannot afford to lose. You should be aware of
all the risks associated with foreign exchange trading and seek advice from
an independent financial advisor if you have any doubts.
THE INFORMATION AND STRATEGIES IN THIS BOOK DO NOT
MAKE ANY PROMISE, OR GUARANTEE. MARKET CONDITIONS
CONTINUALLY CHANGE AND THUS, INFORMATION PROVIDED IN
VOLATILITY UNLIMITED COULD CHANGE AS WELL.
YOU SHOULD SEEK PROFESSIONAL ADVICE PROACTIVELY,
DURING AND AFTER ATTEMPTING TO IMPLEMENT ANY
STRATEGY/INFORMATION NEW TO YOU AND YOUR TRADING
KNOWLEDGE, OR STYLE.
NEARLY 95% OF ALL RETAIL TRADERS LOSE.
PLEASE DO NOT ATTEMPT TO TRADE FOREX IF YOU FEEL THE
AFOREMENTIONED EVEN REMOTELY APPROACHES YOUR RISK
TOLERANCE. THE BEST ADVICE TO MOST INDIVIDUAL'S
CONSIDERING TRADING FOREX – IS UNLESS YOU HAVE
PROFESSIONAL HELP – DON'T.
 ACKNOWLEDGEMENTS
Sandy and Ed – Thank you! I love you!
Karen, Mike and brilliant Ryan! I love you!
Thank you FxStreet…Maud and Vicki… Your patience is amazing! Thank
you Marcel ter Beek for your feedback and patience! Thank you Michael Soni
for your time and guidance (and the initial 'poison tree' metaphor.) I really
appreciate all that you've done! Thank you Alvin Yu, Adam Huo and all of
ECTrader.Net in Guangzhou, China. To Francois, thanks for still believing in
me…we're almost there!
To Mark and Tanya Harrison… Mark I am very excited for your new book
on Mortgages to hit shelves soon! Mark, you're an incredible writer! Thank
you Ed Carson for your friendship, past guidance and continued support.
Thank you to TradingMarkets.com and to Investopedia.com - Chris! Thank
you Carl Killough, your trading is brilliant buddy – perhaps one of the best I
know!
Thank you to everyone who I have not mentioned who stuck by me during
the composition of Volatility Illuminated… The project pushed every ounce of
everything I have to the brink… I cannot thank you enough for not giving up!
Last, but not least, thank you Joe O'Connor for editing the 1st version of the
probability article!
 Table of
Contents

LIMIT OF LIABILITY/DISCLAIMER OF WARRANTY (EXTENDED)

ADDITIONAL NOTICE TO FOREX/CURRENCY TRADERS
ACKNOWLEDGEMENTS
PART ONE 2
PARADIGM AT SEA
CHAPTER ONE
WHY SUPERMAN WEARS HIS UNDERPANTS ON THE OUTSIDE 2
THE MAJORITY IS ALWAYS WRONG – ESPECIALLY RETAIL TRADERS 19
THE PRINCIPLE OF BUOYANCY IN MARKETS 22
CHAPTER TWO 30
WHY INDICATORS ARE FAILING IN THE CURRENT MARKET 30
RETAIL VERSUS INSTITUTION 31
LOCK, STOCK AND DOGMA 33
HIIV EFFECT IN ACTION 36
FINDING SANITY WITHIN THE CHAOS 38
CHAPTER THREE 41
BEHIND THE CURTAIN 41
THE PHILOSOPHY OF LOOKING BEHIND THE CURTAIN, EVEN IF IT'S NOT SOCIALLY APPROPRIATE
42
THE STORY OF BLACK MONDAY - 1987 47
THE CONFESSION OF MASS MEMORY FAILURE 52
A DATE WITH BLIND DEVOTION 56
MEDIA MADE MALADAPTIVE MEMORY 67
THE ACCEPTED STANDARD OF NOTHINGNESS 76
TO SEE VOLATILITY ILLUMINATED YOU MUST BE WILLING TO SEE INFORMATION
CLEARLY 80
CHAPTER FOUR 86
FIBONACCI & PITCHFORKS 86
FIBONACCI IN NATURE 87
THE FIBONACCI PROPHECY 88
FIBONACCI RETRACEMENT VOLATILITY 96
AS SIMPLE AS A PITCHFORK 98
MACRO TO MICRO PITCHFORKS 103
DAILY CHART IN ACTION 106
4-HOUR CHART 108
NOTE 113
CHAPTER FIVE 114
VOLATILITY ADJUSTED FOREX FIBONACCI PITCHFORK STRATEGY 114
RULES TO FOLLOW 124
A FEW FINAL NOTES 125
CHAPTER SIX 126
QUAD CCI – THE TRADITIONAL VOLATILITY PARADIGM 126
STANDARD STAN AND THE FOUR HORSEMEN 142
IDENTIFYING POTENTIAL REVERSALS WITH CCI 148
PART TWO 154
VOLATILITY 154
ILLUMINATED 154
CHAPTER SEVEN 155
INFORMATION ACCELERATION IN THE 21ST CENTURY AND THE VOLATILITY PARADIGM 155
PRE-LOADING MAJOR 158
MARKETS FOR VOLATILITY 158
MARKET VOLATILITY THROUGH EINSTEIN'S THEORY OF SPECIAL RELATIVITY 172
CRITICAL MASS AND CONSCIOUS UNAWARENESS 179
THE TIPPING POINT OF INFORMATION MASS 185
CHAPTER EIGHT 197
VOLATILITY AND PROBABILITY THROUGH THE MOVEMENT OF DISTRIBUTIONS 197
WORDS OF CAUTION 200
TRANSCENDING MARKETS THROUGH VOLATILITY AND PROBABILITY 201
GAUSSIAN CURVE REVISITED 208
THE EXPANSION AND COMPRESSION OF SUBSET DISTRIBUTIONS 224
CHAPTER NINE 239
VOLUME WEIGHTED AVERAGE PRICE (VWAP) 239
CHAPTER TEN 255
- WVAV - 255
WHISTLER VOLUME 255
ADJUSTED VOLATILITY 255
WHAT IS WVAV? 256
MEASURING MASS AND ENERGY 257
MASS AND ENERGY THROUGH STANDARD DEVIATIONS 267
WHAT THE MULTIPLIER EFFECT MEANS TO US 269
WHY DO WE LOOK FOR VOLATILITY SPIKES? 271
WVAV VOLATILITY/ENERGY 274
CHAPTER ELEVEN 285
THE PHILOSOPHY OF ORDERFLOW AND MARKETS 285
MOST RETAIL TRADERS NEVER CONSIDER THE TERM 'BENCHMARK' 290
BIOVAP MAN AND THE INSANITY OF DR. WATERMELON STUFFER 295
BUY SIDE/SELL SIDE 296
CHAPTER TWELVE 306
WAVE • PM 306
WAVE • PM, WVAV AND QUAD CCI 314
CHAPTER THIRTEEN 319
THE DYNAMIC MOVEMENTS OF SUBSET DISTRIBUTIONS 319
THE NEVER-ENDING SEARCH BEHIND PROBABILITY DISTRIBUTIONS 321
CHINESE RESTAURANT PROCESS, PROBABILITY/ VOLATILITY AND DISTRIBUTIONS 324
PROBABILITY DENSITY 327
FUNCTION (PDF) 327
RULES OF 331
TRADING DISCIPLINE 331
SIX CORE PRINCIPLES 333
OF TECHNICAL ANALYSIS 333
ADDITIONAL DISCLAIMER 334
CUSTOM INDICATOR CODE I 335
WAVE ● PM 335
CUSTOM INDICATOR CODE II 339
DUEL CCI WITH SIGNAL 339
CUSTOM INDICATOR CODE III 343
WVAV 343
BIBLIOGRAPHY / RECOMMENDED READING 347
END NOTES 349
 PART ONE
PARADIGM AT SEA
 Chapter One
WHY SUPERMAN WEARS HIS
UNDERPANTS ON THE OUTSIDE

"Believe nothing, no matter where you

read it, or who said it, no matter if I have
said it, unless it agrees with your own
reason and your own common sense."
~ Hindu Prince Gautama Siddharta

J ust possibly, a significant portion of the information we've been

traditionally taught to think of as 'accurate' in trading, investing and life,
might be flawed...especially what we perceive as the best possible order
for our underpants.
I hate to say it, but it's true. After ten years of research, trading,
analysis, writing six books and over 1,500 articles about various aspects of
markets, I am convinced the mass public - and most of the experts - are
snowed.

Mark Whistler • Volatility Illuminated • Page 2 of 363

 The present epidemic of misinformed masses is precisely why over the
following pages, I will present multiple cases showing how the majority's
perception of information and markets is drastically flawed.
In addition, while many believe 21st century technology has created a
more productive, 'progressive' and intelligent society, in reality (at least, as
seen from the trading floor) the greater public seems to actually be
regressing in ability to accurately perceive major market moving events
significantly beforehand.
Underlying causes are both complicated and numerous; however, our
contemporary light speed of information, increasingly 'factory setting'
dependant mindset and growing naive trust of 'fast-mass media' all stand
out as bold culprits behind humanity's swelling herd behavior.
On the outset, retail traders often complain of increased volatility in
today's market, seemingly from nowhere.
The retail trader is correct about one thing; volatility is becoming fiercer
in markets, especially Forex.
While we personally have zero ability to halt erratic market swings (a
larger archetype than we are, of course), we can attempt to see today's
erratic Volatility Illuminated through diligent, open-minded and
perseverant investigation. To do so though, we will need to find new
flashlights capable of cutting through the thick fog, which has now settled
upon markets.
Unfortunately, in today's trading environment – even with all of our
high-tech everything - most retail traders, media pundits and even
professionals simply cannot see three feet beyond their nose, let alone light
a reliable path into the distance.
Fact is, analysts, retail traders, media and even many high-finance
professionals feel empowered with their 50,000 watt technical analysis
and 'reliable information' fog lights.

Mark Whistler • Volatility Illuminated • Page 3 of 363

 We're really talking about the blind and oblivious mass acceptance of
mucky, grimy, tampered, booby trapped, credulous and opinionated
information, simply because such is 'the accepted standard'.
The problem is- the big shiny lights do nothing more than actually
create a 'blinding screen' on the face of the brume.
All too often, media, analysts, and masses don't even have a clue the
tool they're depending on for guidance- is really the problem.
Even if you are aware of the situation, don't bother attempting to
mention the problem; you'll just hear something like:
"It's commonly known this thing can light up a cliff 1,000 miles away.
Besides, I'm 'certified' to use it; didn't you see my credentials in the capital
letters after my last name? And I wasn't trained to use the big light- just
anywhere; my school was ivy."
You might reply, "Don't you mean 1,000 miles- on a clear night?"
"This bulb is the best money can buy...and I've got credentials," the
financial professional replies.
Just to be nice you offer, "I know the bulb is expensive, but I have an
extra one here in my pocket- it's designed for fog... You're welcome to
borrow it."
The troop leader turns away with an abase chuckle- while rolling his
eyes in the vision of his witless 'mega-fog-light' followers.
You can't be angry though; you just feel bad for the whole group.
Sadly, the general public is attracted to the same media/analyst big light
too, all believing there's no way mainstream media and Wall Street
professionals could be so obtuse, as to not truly know what they're
doing…and off into the night they march.
Making matters worse, brokers and financial news portals have
generously provided all customers with the exact same personal wide beam
fog light contraptions for use during their little expedition into the darkness.

Mark Whistler • Volatility Illuminated • Page 4 of 363

 Nevertheless, the identical wide beam spots only make the crowd more
dim-sighted by adding another layer of glare to the front side of the fog.
Really, the mega-light fanatics are creating a sort of floating (though
radiant) sheeting only a few feet into their speculated direction. Because
the masses do, in fact, all have their own little lights they think are
worthwhile, while the 50,000-watt media monkey's prod from behind, they
all start dashing into the fog…
Clueless of the cliff just a few feet away...
Over the following pages, I will attempt to provide a very, very special
flashlight…. Not only does it perform well, but it works in rain, snow, fog
and of course, on a clear night.
Moreover, I think once you switch it on, you're going just stand there
speechless and shocked, as you begin to see the terrain (beyond the fog),
for the first time, in a long time.
You will also likely look over at the larger media/analyst/retail troop
marching credulously into the night…and say nothing.
You would normally laugh at the current situation, but you can't – it's
devastating.
You're standing there with your light – you can see – and because you
can, you know the herd…the retail traders and investors, all with their
identical broker issued spots and the media with their analyst fueled
50,000-watt mega-mouth beams…are all swaggering into the foggy night,
totally clueless they're just a few feet from a massive ravine.
Even if you try to help, almost none will believe your little light works
better than the larger lightshow of the collectively credulous circus.
Let me ask you a question…
Is it possible – even remotely possible– that perhaps our perception and
digestion of, and action upon much of the information we have been taught to
believe as accurate and reliable…may have been flawed from the start?

Mark Whistler • Volatility Illuminated • Page 5 of 363

 Let me tell you about a guy I know; he's perhaps not the brightest of the
bunch… He is a trader though, and he has never done anything else his
entire career. When I asked him why he trades for a living, his reply was:
"To make $40 billion dollars beating markets."
In reality, 'not so bright guy' is me.
I'm still a long, long, way from my goal of $40 billion, but with the
information in this book (and years of experience and disciplined money
management) I believe I will someday make my $40 billion goal real. Why
do I yearn for $40 billion dollars? Because I've always had another dream:
Buy a black jet; paint a 'skull and crossbones' on the tailfin and fly
around the world giving $39 billion away to help people - all people.
Perhaps I'm crazy...
Regardless of sanity, in pursuit of turning the previously mentioned
dreams into reality, I have chosen trading as my genie of action.
Over the years, one major heartache I've found - trading for a living - is
when one rubs markets three times, the only thing that comes out of the
'wishful thinking market lamp' is a margin call… Not a dude in tights
joyfully granting three wishes. In my time, I've seen more grown men cry
on trading floors than I care to remember. I've also seen one make
hundreds of millions of dollars. I am not the 'one' yet, but I intend to be.
With all of this in mind, the information you are about to read in the
following pages was derived from countless hours grinding it out with the
market, in an effort to create my own magic lamp. What I'm talking about
is the culling of thousands of hours of research, real-time trading (I do not
back test, or trade demo to prove a strategy), breakouts, blowouts,
headaches, elation and in the end, insights that I would have never found
without having taken the rocky, unstable, non-traditional route that I have.
After just short of 4,500 days of eating, sleeping and breathing markets;
after endless research, writing, analysis and of course trading – at the ripe
old age of 35 – I posses something more than a head full of gray hair…
I have a hidden treasure.
Mark Whistler • Volatility Illuminated • Page 6 of 363
 – A very special light, really.
As hidden treasure goes, often very few know it exists, when it does
exist, which is why it was so hard to find...
Because I had to find it myself...
If there were others I crossed along the way - who already knew - they
didn't let on.
And I understand why one would want to protect knowledge of the
treasure's existence, and location.
Not many people seek to give their money away, just to give it away.
For those who do know of the treasure's existence though, sometimes
they even intentionally burn their maps to keep others from coming into
possession of information containing the whereabouts.
Without a map, the chances of finding the treasure are virtually zero,
especially when one doesn't know to even look for it in the first place.
What's more, for those who are seeking the treasure, sometimes even
when they're standing directly over it, they still won't be able to see it.
That's how it was when I began looking…
Every once in a while over the years though, I would unexpectedly
catch glimpse of an amazing shimmer within markets; something so bold,
luminescent and brilliant, I would stop everything to investigate it.
But it was always gone in a brief second.
By the time I located what I thought was the source, no evidence of the
glow remained.
The light was so brilliantly overwhelming though, I simply couldn't get
it out of my mind's eye. I began looking for the magnificent illumination
each day - and night - sometimes not sleeping for two, and even three-
days at a time.
Many of those around me wondered if I might be going slightly nuts...
A few times, I think I might have wondered too.

Mark Whistler • Volatility Illuminated • Page 7 of 363

 I even spent the entire month of November in 2008 at the World Trade
Center in Guangzhou, China working with several programmers and
traders on the trading floor of ECTrader- to develop and code the
information I'd uncovered to that point...
This fall, I'll travel half way around the world to work the Chinese
traders and programmers again... Not only are they some of the nicest
guys in the entire world, but I've never met better programmers...ever.
Even after China, I was still missing few critical pieces though... But
over this past winter and spring...
I finally compiled enough information to clearly see Volatility
Illuminated in a way the masses have yet to.
I can tell you this... Towards the end, it was almost as if daylight were
growing from the horizon- after a long dark night... Before I completely
realized it- there was light everywhere.
In my arduous search over the years, there were moments so difficult; I
almost gave up many, many times. Honestly, the search to see Volatility
Illuminated was so grueling; I sometimes wonder how I made it through,
without quitting.
You don't have to go through what I did though... And I hope you
don't. And won't.
It is my hope - that with the information in this book - you will be able
to clearly see Volatility Illuminated, without having to endure all that I
did.
While compiling this book, I've asked myself - at least a dozen times -
why I'm giving up any of the information I've found? My search was
arduous and at times – literally – painful...
Strangely, every moment along the way, both good and bad, was the
precise event required to dislodge (sometimes in the most unexpected of
places too!) a little piece of information that I desperately needed to take
another step forward with Volatility Illuminated...

Mark Whistler • Volatility Illuminated • Page 8 of 363

 Even an understanding of why Superman wears his underpants on the
outside...
Again though, I have asked myself repeatedly why I'm giving up what
I worked so hard to find?

1. I am presenting the information here because I believe I can say with

a confident voice, most have never seen Volatility Illuminated before,
at least, as I will present here. In addition, I believe retail traders
sorely need the information right now.
2. I'm a trader. I trade for a living. Writing this book is a trade too. You
get information- I get money. If I blow up doing something stupid
five years from now, thankfully I will have hedged my position with a
few bucks from these words.

I think it's a good trade... And by laying size out at the offer, obviously,
with all of my years of sacrifice, research, and hard work, I'm long
Volatility Illuminated. Now, I 'm offering out of some of my position into
strength - precisely at the 38.2 Fib Retracement. If the demand the tape has
shown in the last few days of May is real, I may later regret not lifting my
offer higher - now - but for the time being, I think it's fair.
Yup, everything is a trade.
I can't say I'm putting absolutely everything I've discovered in these
pages…but it is definitely enough…
Likely, more than enough to finally give the little guy...
The retail trader...
– Something of value to help level the playing field in today's media-
mania, monster truck institutional orderflow markets.
On another note, I am almost certain those in the financial media do not
know about the treasure you're to going learn here… Otherwise, they
would have already brought it to the market's attention. I've heard a few

Mark Whistler • Volatility Illuminated • Page 9 of 363

pundits lightly brush on one aspect of the treasure or another – almost as if
they'd sensed it was there, but I do not believe any have ever found it (or
even heard of it) completely.
Moreover, I believe there are a few great investors and market minds
'in the know' about the concepts to follow…though likely keeping quiet.
What's more, in my research, I've come across various pieces of the
treasure - here and there - but I have never found much compiled all in
one place…in an easily understandable format. What little of the treasure I
have heard mentioned in conversations and radio, caught glimpse of on
television, spied in magazines or newspapers, or found on the Internet –
was not (I do not believe) geared for, or meant to grab the attention of
retail traders.
Before we go too far, I need to give you a few warnings about the
treasure in this book…

 It won't make you instantly rich this hour, but it could over time.
 You can't sell it on eBay today, but you can try.
 You cannot take the treasure all for yourself, though many people
would.
 You cannot horde it in your upstairs closet at home; it won't fit in a
shoebox.
 The treasure (by itself) likely won't even buy you a hotdog on the
corner, but someone might offer to give you all the hotdogs in the
world just to know what it is.

I would like to mention something else… You will not be able to see
the treasure at all, if you only want a 'gimmick' to make money quickly.
The treasure is not a 'gimmick' - it is real - but to see it, you must have the
desire to truly understand markets and trading.

Mark Whistler • Volatility Illuminated • Page 10 of 363

 While writing this book, I often handed the manuscript to a small
handful of 'test readers' for feedback. One of the test readers made a
comment similar to:
"You may want to remove, or change the bullets about it won't make
you rich and you can't sell it on eBay, because some people might think
'well what good is it then?' or 'I don't want to waste my time then' and then you
might lose some readers."
I really appreciated the comment, because my friend was truly
attempting to step into the shoes of the masses… I thought about
removing the seemingly self-defeating bullets, but then concluded I would
not.
Why?
Because my friend's perception of many potential reader's likely
fickleness was spot on. However, the reason the treasure remains buried
day-after-day, month-after-month and year-after-year to media, retail
traders, analysts, and the public is precisely in the comment itself.
The treasure has remained hidden because one will not be able see it if
they are only seeking an easy, automated, 'no effort', instant gratification
solution to markets.
The treasure is mostly invisible to the retail eye because upon first
glance, it appears worthless, though really, it holds immense potential
riches and value.
The treasure is not simple; yet it's also not so complicated that almost
anyone can't understand, or use it.
The only people who will not be able to see or use the treasure are those
who never wanted to see it in the first place. The desire to see Volatility
Illuminated - means you must have already - somehow - wanted to know
(and see) markets better. Those who have never truly desired to
understand markets and trading (and were not willing to put in some
good old-fashioned hard work) just wouldn't know to even look for
Volatility Illuminated in the first place.

Mark Whistler • Volatility Illuminated • Page 11 of 363

  Media only cares about being in the middle of a 'hot story' and most
pundits and analysts never really trade their own money…
 The bulk of retail traders hardly ever really 'think' about information
they receive and act upon, and rarely truly attempt to learn
fundamentals of markets...
 Many investors seek something, or someone to do the work for
them…
 Often, if retail traders, professionals, and/or media can't see value in
something instantly, they throw it away…

Thus, the treasure is most often invisible to the common eye.

I bet many readers have personally walked by it a dozen times and
never even sensed something amazing might be nearby.
I know I did. On a rare occasion, I still do.
The treasure is so obvious though- once you see it, you might ask how
you missed it all this time?
It is possible; however, that even after reading this book, some still will
not be able to see it, even if I directly point it out, as best I possibly can.
How could it even be feasible for an 'obvious' trading treasure to exist,
as I am mentioning here (something of great potential value), right infront
of all of our eyes, and yet invisible to the masses?
My conclusion is the treasure remains invisible to the masses, because
to see it - and to use it – means one must first not only have the desire to
see it, but also acknowledge that the common perception of the
information we receive (as even 'mostly valid') could be flawed...
 Wrong about the information we accept daily.
 Wrong believing what we've been taught is accurate.

Mark Whistler • Volatility Illuminated • Page 12 of 363

 Possibly wrong about some of the things we think and feel at this exact
moment.
 Maybe even wrong about our own memories right now.

How many are now thinking, "…that sounds fascinating, please show me."
And how many are really thinking, "Are you crazy? Whatever, this is
hocus-pocus. My memories have nothing to do with markets."
Like the masses were historically wrong about the world being flat, the
sun revolving around the earth and wrong about slavery - as being even
remotely acceptable or moral, before the final Emancipation Proclamation
and 13th Amendment came to life in 1865.1
(By the way, the 1860 United States consensus showed 393,975
individuals owned 3,950,528 slaves. The 1860 document also shows that
there were just over 31 million people in the population. Only 8% of the
population owned slaves.2 What the aforesaid means is -as always- a
small percentage of wealthy corrupt – sway the opinions of the masses and
hold the majority of power in society, economics and politics.)
Much like the masses thought the world economy was absolutely
doomed after the crash in October 1973, especially as major indices
skidded south into the end of 1974. But in January of 1975, markets
rocketed higher.3
Probably why Warren Buffet, the brilliant and amazing investor often
says, "Buy when others are fearful and sell when others are greedy."4
Much why many will happily repeat Buffet's words, but then never act
on the advice personally.
To step apart from the masses, one needs to take action.

Mark Whistler • Volatility Illuminated • Page 13 of 363

 Almost everyone tells children to follow their dreams, but so few truly do as
adults.
Even after I show you the treasure, it will take time and effort to unlock
the power within. Volatility Illuminated will not work instantly for those
who want nothing more than a lotto-ticket, or 'plug-and-play indicator' -so
they can mindlessly know when to buy and sell, without really adding any
effort.
However, if you truly desire to see Volatility Illuminated and you're
willing to put considerable effort into understanding the 'philosophy'
behind such, the greater your chances of using the treasure to pull millions
out of markets.
To see Volatility Illuminated though (and then utilize the information
effectively) a paradigm shift will likely be required in your mind. No
matter how hard I try, I can't help you see it if you totally believe what
you've been taught about markets and trading (in terms of fundamentals,
technical analysis and information), is absolutely right and proper.
Just know this, if you're willing to open you mind, please don't fear
Volatility Illuminated may be too complicated to comprehend. I am proof
of the pudding that you don't have to be a rocket scientist to get it. I am
also virtually certain you don't need to be a seasoned Wall Street pro, or
even college educated, for that matter…
All you need is the ability and willingness to challenge the traditional
paradigms of what you have been taught about investing, markets and
trading in today's high-tech, 'light-speed information' world.
Again, in Volatility Illuminated, I hope to completely change the way
you look at trading and markets and I seek to give you the tools you need
to trade perceptively and profitably.
I have put hundreds of hours into the theories, concepts and strategies
you are about to read. Moreover, I've spent nearly as much time tactically
planning and organizing how to convey the information to you in this
book. I did not write this book just to write a book. This book was written

Mark Whistler • Volatility Illuminated • Page 14 of 363

to deliver concepts to the masses that have been missed, overlooked, held
back, or simply not discovered - to date.
With this in mind, every word, every sentence, paragraph and chapter
has a specific reason for its placement within the larger work.
In Part One, we will cover some basic groundwork behind Volatility
Illuminated, flushing out why some of what we accept as truth is not,
while also seeing how instances of fundamental and technical analysis can
be helpful to our trading, but really require more.
In Chapter Two, we will discuss why technical indicators are built for
failure, are indeed currently failing, and how you can overcome the
destructive reality at hand by taking time to step back from markets with
clear eyes. We will also touch on why and how technology is really
creating a larger 'blind mass', rather than helping.
Next, in Chapter Three we will cover why the much of what we think
we know could be an illusion. I'm talking about our own memories even. I
hope to challenge our unquestioning acceptance of our understanding and
perceptions, not only of our own minds, but the reasoning and sensibility
behind much of the information we take in daily.
In the remainder of Part One, we will walk through two technical
strategies (Fibonacci Pitchforks and Quad-CCI Momentum) that I've found
work reasonably well. However, I won't just present the positive aspects
of Fibonacci Pitchforks and Quad CCI, but also seek to show how at times,
almost all pure technical analysis breaks down. It is here that we will open
the door to volatility, probability and the movement of distributions
(statistics).
By the end of Part One, you should have moments of excitement,
coupled with questions about whether anything 'really works' in this book,
markets and/or in attempting to see and predict volatility.
Then, in Part Two, we will dive into descriptive statistics (in terms of
distributions), while tackling volatility and probability right away.

Mark Whistler • Volatility Illuminated • Page 15 of 363

 In Part Two, I seek to not only present Volatility Illuminated in an easy-
to-understand format (for those who do not have hordes of experience),
but I also hope to show why tenured traders may want to rethink some of
what they've been taught to believe as truths of information, markets,
trading and volatility, as well.
I will also present some theoretical ideas combining physics and
markets...
Don't worry though, no calculus or math will be required.
As you will see though, through Einstein's Theory of Special Relativity,
I will prove that the entire paradigm of information colliding with markets
has changed, partially through the acceleration of information over the
past 100 years.
As we move through the first chapters of Part Two, you will also begin
to learn why and how mass, acceleration, force and energy all 'critically'
apply to trading today.
Again, you won't need to understand the math, but readers absolutely
must take the time to understand the philosophy and theoretical modeling
behind the concepts within Volatility Illuminated. I have done my best to
explain the entire paradigm in plain, everyday language.
In addition, we will also combine physics (specifically mass,
acceleration, force, and energy) with volatility, probability, subset
distributions, and institutional benchmarking to form Whistler Volume
Adjusted Volatility (WVAV) and Whistler Active Volatility Energy •
Price Mass (WAVE • PM.)
The information you are about to read is not a regurgitation of old
ideas, like most books on trading.
The ideas presented in Volatility Illuminated are fresh,
groundbreaking, innovative, and are really my life's work.
Moving on, in Part Two, our discussions will move from physics to
volatility/probability and distributions...opening the door to institutional
benchmarking and VWAP.

Mark Whistler • Volatility Illuminated • Page 16 of 363

 The information on VWAP is intended to be delivered in a humorous
format, though really, could be game changing for most readers.
After many, many hours thinking how to present the information to
you, I finally came up with the story of Captain BIOVAP and Doctor
Watermelon Stuffer, as the relay. (Trust me, if I explained it from a
professional technical market perspective, not only would 70% of readers
not get it, but the other 30% would be asleep by the time I was finished...)
However, do not take the information lightly.
Really, 'the theory of stuffing watermelons into mufflers' is why most
retail traders lose.
Fact is, they never understood the game from the start. When you
understand Doctor Watermelon Stuffer, you understand institutional
trading.
With the aforementioned in mind, we will then break into WVAV and
WAVE • PM.
My intent with WVAV is to show how and why we can integrate
mass/energy concepts into VWAP, thus locating levels of volatility and
probability, possibly providing insights many institutional traders have
even missed.
The concepts you are about to read about are designed to help all
traders; meaning both institutional and retail.
I will also show how and why WVAV and WAVE • PM allows one to
see when markets are about to trend, when trending has ended, and even
when to expect consolidation.
Through WVAV and WAVE • PM, readers will learn probability
trading, perceiving volatility and orderflow (ahead of the game) and
perhaps most important: how to use the information within - real - day-to-
day trading.
By the end of Volatility Illuminated, you will posses information about
indicator and information failure, volatility and probability, institutional

Mark Whistler • Volatility Illuminated • Page 17 of 363

orderflow, mass, energy and force in markets and distributions – all pulled
together in a simple, understandable format and methodology...
You will understand what Whistler Volume Adjusted Volatility
(WVAV) and Whistler Active Volatility Energy • Price Mass (WAVE •
PM) are, while also seeing why the totality of the entire paradigm; the
strategy, methodology, theory, philosophy, and signals are like nothing
else markets have ever encountered...
You are about to set eyes on the critical underpinnings of market
movements and trading – which virtually all media, retail investors and
professionals never, ever see.
What you are about to read is powerful, useful, actually works in real
time and can help you succeed in trading - once and for all.
But you MUST be willing to consider that everything you've been
taught to date…is skewed.
Now that you know what to expect in the pages to come, I'm very
excited to explain:
...why Superman wears his underpants on the outside...
...and also, why it matters so much - to you - right now...
...as you're about to discover...
You may want to consider wearing your underpants on the outside as
well…

Mark Whistler • Volatility Illuminated • Page 18 of 363

 The majority is always
wrong – Especially retail
traders

The 19th Century playwright Henrik Ibsen penned:

"The majority is always wrong."
Again, the 'majority' thought the sun circled the earth before Galileo.
The 'majority' thought the world was flat before the days of Columbus,
even though other great thinkers had shown evidence of a sphere planet
long before.
Around 330 BCE Aristotle surmised the earth was round and in 240
BCE, Eratosthenes created a reasonable estimate of the earth's
circumference…
And yet, the masses still believed the earth was flat- for almost 2,000
years more.
It would be rude to say something like, 'people are cattle', which would
never surface in the pages of Volatility Illuminated. After all, a statement
like 'people are cattle' would infer the masses simply move when prompted
to do so, by almost nothing more than the directional stampeding of the
larger group.
Actual people couldn't possibly be that mindless could they?
Would you ever mindlessly accept news or even [gasp!] believe in a
mainstream media opinion, simply because the bulk of society had
accepted the information as valid?

Mark Whistler • Volatility Illuminated • Page 19 of 363

 It's hard to believe for one moment, human beings might be that silly.
People would never credulously accept inaccurate social, political, or
economic trends, merely because such had become 'progressive', or the
'accepted standard', would they?
However, with each passing day and every laborious hour of research, I
begin to believe they would. At the end of the day, the majority is almost
always…wrong.
Perhaps, it's not completely the larger group's fault though. The more I
look at the totality of information delivered to investors and traders; I see
where and how they have been set up for failure (within trading and
markets, economics and politics) from the start.
I'm not just talking about Forex either; I'm talking about all
markets.
Some people refer to the phenomenon of the general investing public
seemingly always on the losing end of the stick, as proof trading is nothing
more than a 'zero sum game'.
Perhaps the common perception that markets truly are a 'zero sum
game' is precisely correct, for those who've never been exposed to any
information, other than the noxious rattling of media and so called
'professionals' who have an agenda.
Consider this for a moment:
If one eats apples from a tree with poisonous roots, chances are the
apple is poisonous too, right?
After all, a poison tree probably only produces poison apples…
For the average investor –in the short run- the apples sure look pretty
though and they're just so tasty, investors keep going back for more – even
if they'd fallen sick from eating the apples once before.
The tree -like all trees- follows the seasons though. The tree blooms in
spring, grows luscious apples during the summer, sheds its fruit in fall,
and then grows dormant when the coldness of winter arrives. Spring

Mark Whistler • Volatility Illuminated • Page 20 of 363

always comes back though, even if the winter was longer than most on
record.
When spring does finally arrive, media is always there to tell the world
about the new fruit budding.
Investors are reluctant at first, remembering the sour fruit that had
made them so sick the previous season…
Many are even still recovering from the poison they couldn't digest, or
barf out…
But the media is there – touting the trees and the season, often
reporting this season could be the best and longest and safest yet.
However, smart money already staked claims on many trees and their
potential production in late winter, or early spring, often before the
'season' of today was even in the minds of most.
As summer unfolds and the apples begin to take form, media
comments on how they look tastier than ever. While the apples are
developing, they're not poisonous though, as shown by media eating
gorging on the fruit as quickly as it can, while touting to the world how
delicious and safe they are this time around.
At this point, the lure of the flavorsome fruit is becoming irresistible for
most… Towards the end of the summer, media is at the harvest in full
force touting 'the grandest bloom yet', while also mentioning that this
season's apples are not only the safest ever, but could still grow even
larger.
Media even starts to present the possibility winter may never come
again. Finally, giving into the media bolstered temptation – investors can't
resist any longer. They buy apples...hordes of apples.
But the apples have a secret…
The apples from the poisoned trees are safe to eat only so long as the
temperature remains warm…

Mark Whistler • Volatility Illuminated • Page 21 of 363

 But when the first cold sets in, the cores release a deadly toxin into the
meat of the fruit.
Those who were the last to buy don't have a clue what just happened
under the surface of their purchase, as they bite in…
Sometimes, even institutions buy tainted fruit too, thinking they know
better than the public where the poisoned fruit is, and is not. But they're
wrong too.
So I ask, why do the people keep buying apples from the exact same
tree that produced poisonous fruit the previous season?
And then, I have to ask an even more important question…

In the paragraphs you have just read, did you… even for a
moment…consider that perhaps it was not the tree, or the apples, or
even the roots, which were truly poisonous…

Perhaps the tree wasn't really poisonous at all…

But the soil the tree is growing from…is.

The Principle of Buoyancy IN

MARKETS

I believe that back testing is a joke. Everyone has perfect 20/20 hindsight.
Thus, in developing the trading strategies here (from a retail perspective); I made
sure to test each and every one with real money. I'm not going to barf out a

Mark Whistler • Volatility Illuminated • Page 22 of 363

win/loss percentage, Sharpe Ratio, or any of the other canned junk people use to
bolster whatever it is they are selling…

Because all that matters is today. Right here - right now. Past results are no
indication, or guarantee, of future performance.

This book is not about a 'system', this book is about truly learning markets and
becoming skilled at seeing Volatility Illuminated, once and for all. Moreover, in
my humble opinion, learning to trade comes down to the quote:

The law of flotation was not discovered by

contemplating the sinking of things, but by
contemplating the floating of things which floated
naturally, and then intelligently asking why they did
so."
- Thomas Troward

Interesting quote right? Right. Except that at times, it's the opposite of
trading. I hate to say it, but without a clear understanding of why what's
happening is happening, trading is the opposite of buoyancy.
The reality of the situation is:
Traders and investors have a limited amount of time and money;
however, markets have an unlimited amount of time and volatility.
If you simply toss your money into markets, thinking you've picked a
safe entry and given your position a liberal stop, just so you won't be
unnecessarily taken out and then step away… Chances are, markets will -
eventually- hit your stop, or produce a margin call, much sooner than your
sanity and/or wealth can 'wait out' the pain of a massive pullback.

Mark Whistler • Volatility Illuminated • Page 23 of 363

 I remember a long time ago, just after I started trading; I hit a three-
month rough patch where I couldn't seem to make a decent trade to save
my life. One day, angry, upset and whinny, I decided to just flip a coin
during the entire US session and take my trades in whatever direction the
coin prompted.
My theory was this: I should have a 50/50 shot, up or down, in picking
the direction of my trades. However, I also figured my odds would be
even better because I have something 50/50 probability does not account
for: money management skills.
I figured even if I didn't like the trade, I could just place a strategic stop
(cutting losses quick and letting winners run) and I'd surely come out
ahead in the end.
Nope. I was just about even on the day…but it was a painful even.
See, if you don't have a real reason to be in the trade from the start, you
won't have a solid reason to know when to get out. (And vice versa
really.)
Anyway, randomly tossing cash into markets is more like 'the theory of
sinking things', over that of buoyancy.
Here's what I want to tell you about the concepts coming in Volatility
Illuminated…
Over the years, I have taken some big losses to uncover the information
you are reading… I'm not even going to talk about the wins, because in
the latter half of the book, you will see where, how and why the principles
work. I don't need to tout what most people only do – past wins.
But I will touch on the losses – because they are what matters most to
see Volatility Illuminated…
I've already 'contemplated the theory of floatation' for you…and as we
roll out the principles of Volatility Illuminated over the following pages,
you will see likely what works, without me having to run my mouth about
my winners. If I were to only discuss my wins, the occurrence would be

Mark Whistler • Volatility Illuminated • Page 24 of 363

like giving you a set of keys to a supercharged 357 Mustang and an open
highway, but then forgetting to mention the car has no brakes.
Throughout the years, as I was developing all that you're reading,
every single time I lost, I would ask myself a massive pile of questions- in
an attempt to uncover why the trade did not work.
Every single time I went through my little self-interrogation (with
honesty) I constantly found one question as the main culprit behind almost
all losses:
Was my information wrong?
There's really only two answers to the above:
1. Yes, my information was faulted, and/or…
2. My information was correct, but my understanding and application
of the information was not.
Amazingly, it was the question, "Was my information wrong?" that not
only caused many headaches, but was the catalyst for success.
It was the sinking of things that brought the volatility theories of
flotation (which you're reading right now!) to light.
Again, it was in constantly asking the one question (that produced two
more questions ) that unearthed the hidden and mysterious volatility
within markets that often plagues most traders for all of their days.
Funny thing those old self-introspection and honesty questions; here's
what they produce:
Growth.
In the end, I not only found answers to why and how retail traders lose,
but I also discovered the answer to, why Superman wears his underpants
on the outside too.
The answer is this:

Mark Whistler • Volatility Illuminated • Page 25 of 363

 Superman wears his underpants on the outside because really, he
knows he can beat up anyone who makes fun of him for wearing
Underoos™ on the outside of his pants.
Just kidding…
Really, Superman wears his underpants on the outside because he is the
inverse of mass humanity. Superman is everything we are not. Superman
is the inverse of greed, ego, fear, dishonesty... All the things that keep
retail traders from winning big.
Unfortunately, as regular people we are not, "Faster than a speeding
bullet, more powerful than a locomotive, or able to leap tall buildings in a single
bound."
But Superman is…
Hold on a second though… We might actually be able to do the
marvelous things Superman does… What I mean is…how do you know -
for sure - you can't? Have you ever tried?
With your underpants on the outside of your slacks?
Regardless if you've ever run down the street next to a passing locomotive –
with your underwear atop your jeans- please know this…
In essence, we are penetrable organs and bones on the inside, while the
world is seemingly impenetrable (to us) on the outside.
Superman is the opposite, impenetrable on the inside, and penetrable to
the world from the outside.
Superman - as a walking bag of biology - is stronger than the world
surrounding his physical form.
Logically, we can diagram Superman in relation to the outside world
as:

Body → Pants → Underpants → World

Mark Whistler • Volatility Illuminated • Page 26 of 363

 On the other hand, we can diagram regular people (non-superheroes) in
relation to the exterior world as:

Body → Underpants → Pants → World

or

World → Pants → Underpants → Body

Do you see what I'm saying?

Let me break it down, just in case…
What we are: Breakable.
What Superman is not: Breakable.
What we are: Slow, brash, opinionated, and mortal.
What Superman is not: Slow, brash, opinionated, and mortal.
What we are: Stuck on the belief our underpants should go on the inside of
our jeans.
What Superman is not: Stuck on the belief his underpants should go
on the inside of his trousers.
It makes sense that as metaphor of Superman's extreme difference to
regular humanity- is his preferred order of underpants, relative to what
most people would ever consider in their own lives. Precisely what most
would scoff at others for considering, or doing…
Here's where I'm going with all this underpants business…

Mark Whistler • Volatility Illuminated • Page 27 of 363

 To truly understand why much of the information we believe to be
valid within trading and markets is flawed, we have to be willing to
invert what we have previously accepted as valid.
What I'm saying is that metaphorically, if we want to understand
volatility and markets, we must be willing to consider the possibility that
what we have learned and believe as 'truth' and/or 'the right way', may
not be so correct after all.
Again, let me clarify.
I'm not saying the information you have received is just plain wrong…
What I am proposing is perhaps a different paradigm exists within
trading, markets, and the validity of information we accept from
mainstream media, and to transcend and evolve in our ability to
comprehend, predict, and profit within Forex, equities, options, futures,
whatever…we must be willing to accept an inversion of what we have
come to know as truth.
Perhaps, what we believe to be true - right now - may not be.
To see where and how some of the information we receive and accept
within markets may be faulted, we must be open minded enough to accept
new paradigms.
If we can remain open to new ideas, we might be amazed at what we
are about to find in the following pages.
Bottom Line: If you want to be a superhero, you're going to have to be
willing to wear your underpants on the outside, knowing you are doing
precisely the opposite of what the masses believe is valid and/or
acceptable. Again, 'the majority is always wrong', which is why they wear
their underpants on the inside.
The masses believe that 'underpants on the inside' is the only way to go
about day-to-day business. The 'underpants on the inside' crowd even
laughs at anyone who wears their drawers on the outside.

Mark Whistler • Volatility Illuminated • Page 28 of 363

 Those who wear their underpants on the outside - have superpowers.
Mr. BVD's atop khakis and Ms. Brassiere over blouse can fly.
The undergarment-rerouted-to-the-exterior minority, are really the
inversion of credulous, blind and herd-following masses- who simply
accept common dogma as truth because it is the accepted standard, even
though it's wrong.

Super-traders know much of the information presented to the masses…is

flawed…especially when it comes to markets. Most retail traders and investors
are the inverse of super, which is why so many lose in markets…and then even
keep coming back for more, again and again, without ever questioning what's
really happening under the surface.

With the aforementioned in mind, we will now move into Chapter Two, where
we will discuss how many technical indicators are failing in the current market,
while uncovering why so many traders are likely suffering, when attempting to
trade simply from common technicals.

Chapter Two will open our initial discussion on volatility, though we will only
scratch the surface for the time being. Then, in Chapters Three and Four, we will
cover two technical combinations (Fibonacci Pitchforks and Quad CCI), discussing
how the indicators help traders, while also touching on why current market
volatility could be causing false signals as well. Over the following pages, I ask
you to break from what you currently believe as valid and true, concerning
information, indicators, and markets…

I'm pleading…

If even for a moment, while reading this book, please wear

your underpants on the outside, like Superman.
At least, metaphorically, anyway…

Mark Whistler • Volatility Illuminated • Page 29 of 363

 CHAPTER TWO
WHY INDICATORS ARE FAILING
IN THE CURRENT MARKET
The initial version of this chapter was printed in Forex Journal in the spring of 2009, but
has been revised significantly since.

When it comes to trading Forex, it's no secret retail traders struggle

desperately and most often, lose. The aforementioned statement is dismal,
I know.
However, it doesn't have to be that way…
With a little understanding of "why" retail traders seemingly (endlessly)
toil, shifting the paradigm may actually be easier than many think. In
short, when we truly take a moment to step back from technical trading
and examine how information and indicators impact the decisions of the
masses, a clear picture of why traditional chart-based signals are 'built for
failure' from the start, should arise.
By understanding the true paradigm of technicals, and then making a
few slight adjustments, traders could potentially find themselves suddenly
empowered to navigate markets with confidence and clarity.

Mark Whistler • Volatility Illuminated • Page 30 of 363

 Retail versus Institution
Separate Takes - Same Information

Foremost, it is important to note that institutions move markets, not

retail traders. However, with many institutional and retail traders acting
at similar time, it would almost appear as if they were trading from the
same signals. Upon first glance, it would appear as if traditional indicators
do indeed provide reliable signals for market movements.
In reality though, traditional indicators (like MACD, Stochastics and
CCI) are providing "false signals", especially on shorter-term time frames.
Institutional order flow has nothing to do with 'technical signals' and is
truly derived from perceived risk aversion and future fundamentals.
Despite the true reality at hand, some retail traders continue to believe
traditional technical analysis accurately looks into the fundamental
mindset. What you MUST understand though, is common retail technicals
have nothing (at all!) to do with institutional trading and do not accurately
look into the minds of institutional traders.
At the core of the issue, common technicals never accurately see into
the minds of institutions, simply because the technicals are derived from
an empirical event that has already occurred (lagging indicator) within
price action, while fundamentals attempt to mitigate fundamental risk of
today, while attempting to step in ahead of possible fundamental events of
tomorrow.
Retail traders often lose, because even if they are able to perceptively
step into the minds of institutions, trading successfully commands the
trader is not only able to see the true fundamental paradigm, but also
know when and where to implement a position to capitalize on such. In

Mark Whistler • Volatility Illuminated • Page 31 of 363

non-technical language, one may be able to accurately distinguish that a
particular currency will lose value over the next year because of
deterioration in fundamentals; however, successfully acting on the
information is much, much more difficult, when considering the inherent
volatility within Forex markets today. Looking at our first image, readers
will note the significant rally in the EUR/USD into December 2008. The
euro's momentary recovery can be attributed to a dead cat bounce from
torrid selling in the previous months, coupled with the momentary loss of
belief the US Dollar would continue to avert risk throughout the global
economic crisis.
Conspicuously, even if traders were able to accurately predict the U.S.
Dollar was about to boldly recover from late fall rally in the euro, blindly
taking a position could have been devastating, if implemented based on
fundamental outlook alone. The single daily candle highlighted in late
December shows almost 400 PIPs of volatility, which should serve as
empirical evidence of the excessive volatility at hand within Forex
markets.
The larger issue is simply while
institutions and retail traders may have
unearthed similar fundamental
information (though often institutions
have greater clarity) retail traders who
act on technicals or fundamentals alone,
will constantly fall victim to the
inherent volatility within Forex today.
What's more, the indicators retail
traders act upon are often significantly
different than that of institutional
traders, something many are not even
aware of.
For example, when looking at
descriptions of services banks and institutional companies provide for
larger FX participants, one will note the first two technical

Mark Whistler • Volatility Illuminated • Page 32 of 363

strategies/indicators are almost always Volume Weighted Average Price
(VWAP) and Time Weighted Average Price (TWAP).
However, the charting packages most retail traders use almost never
contain VWAP and TWAP, as indicators. In fact, even MetaTrader
(arguably the retail standard), does not contain VWAP and TWAP
preloaded. Traders can find the code in the back of this book, on the
Internet, and on my Websites fxVolatility.com and
WallStreetRockStar.com; however, the aforementioned are not delivered
already installed within the software's various custom and traditional
indicators. The point here is the main indicators institutional traders are
not only looking at, but also acting upon, are rarely visible within the retail
trader's world. Most often the retail trader must actually intentionally seek
out the indicators; but how can one find what one does not even know
exists?
There's even more to the story, and as readers are about to witness, the
paradigm behind retail technical analysis may have been flawed from the
start. Even worse, the common technical indicators most retail traders
covet could even show greater amounts of false signals in the future.

Lock, Stock and Dogma

To understand why technical indicators are becoming more and more

troublesome in volatile markets, one must take a step back from the entire
situation and examine the "nuts and bolts" of the larger situation at hand.
Constance Brown just about says it all in her book titled Technical
Analysis for the Trading Professional (McGraw Hill, 1999), where she asks:

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 "Why does it appear to us that conventional technical
indicators are failing us as we approach the 21st
Century? What has changed?"
- Constance Brown
Technical Analysis for the Trading Professional

As a brief side note, while Brown's book is almost a decade old, the
information is still extremely innovative, as she often examines the "truth"
behind how and why indicators produce signals. Even more important,
Brown also attempts to uncover how and why traders act on the
information received.
In the case of failing technical indicators, Brown hypothesizes technical
indicators are failing because too many people are acting on the same
information - at the same time. She points out virtually every charting
program comes with the same pre-loaded indicators, with the same pre-set
variables. What's more, she also unmasks the unfortunate reality that
many traders never even bother to question, or change the preset
variables within the pre-loaded indicators. In essence, traders simply
accept the "factory settings" within their indicators as dogma.
At first glance, it would seem common sense that many people acting
on the same information – at the same time - would create a sort of 'self-
fulfilling prophecy' within technical signals. However, the reality of the
situation proves differently. Really, some people acting on the same
information at the same time may create a slight amount of 'self fulfilling
prophecy'; however, when too many people move in the same direction, at

Mark Whistler • Volatility Illuminated • Page 34 of 363

the same time, the real outcome is volatility. Think of it like this: If a troop
of ten men run are running on the street together and suddenly need to
stop before a busy street, all ten will likely be able to do so. However, if
1,000 men are running on a street and a few in front attempt to stop before
a busy street, the mass of bodies in motion behind the will likely bump
into one another, with the greater whole pushing the few in the front into
the intersection. Someone call a paramedic.
Why would trading be any different? When a hundred thousand
traders take the same position, at the same time, based on the same
information, and suddenly the market moves just slightly opposite the
herd's expectation, what will the obvious outcome be?
You probably guessed it; the large mass-herd of traders moving in
unison creates a pop of volatility as the collective whole attempts to switch
directions.
Making matters worse, once the herd is pushed slightly into the
intersection; electronic stop orders begin tripping across the world, like
grids of lights rolling into darkness, as a mass blackout ensues. The "mass
effect" of too many people acting on the same information, coupled with
the domino effect of electronic stop orders being tripped globally, creates
excessive volatility within intraday trading.
While retail traders do not carry enough weight to propagate an all out
"trend" in the world of Forex, they do create short-term volatility. I like to
call it Herd Induced Intraday Volatility, or the "HIIV Effect."
Retail traders move like a swarm of bees and so when I see a clear
signal from a common technical indicator on a 5, 15, or 30-minute chart, I
look for the HIIV effect of volatility to begin stinging.
By the way, with stop order rule changes coming (for U.S. retail Forex
platforms) in July of 2009, the 'rolling blackout volatility' effect could
wane, while overall reversal volatility could increase as traders hold losing
positions as long as possible (it's just human psychology) until major
critical technical points are hit.

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 While the removal of stop orders in U.S. trading platforms may help
bolster longer periods of trending, major points reversal points could
surface with fierce volatility…

HIIV Effect in Action

For traders having trouble believing the technical 'herd effect' I

previously described actually exists, please take note of the following
example.
(By the way, one needs to do nothing
more than scan 5, 15 and 30-minute charts
to discover plenty of examples of the
HIIV effect.)
Looking at Figure 2.2, traders will
notice the 30-minute chart is clearly
showing signs of a potential reversal
pending, at least in terms of traditional
technical indicators, like candlesticks and
stochastics.
One cannot miss - even for a second -
that the 30-minute chart is displaying
three bearish candles (two red hangmen
and one evening star). In addition, using the pre-loaded stochastic
indicator (5, 3, 3) traders see a clear cross of the K-period (blue) under the
D-period (red).

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 The aforementioned stochastics cross-under is occurring at the 80-line,
the exact point many technicians believe produces a reversal.
Seems like a clear short-entry point right?
Hmm…
Look at Figure 2.3, which shows the EUR/USD rallied significantly
after the appearance of the two hangmen, one evening star and a
stochastics +80 cross-under.
There are two events occurring in this scenario:
First, institutional order-flow (read: fundamental mindset) likely
believed the carry trade differential and risk facing oversold levels of the
EUR/USD were prompting short covering and short-term relative range
trend continuation, if even only for a moment.
Second, when the false signals appeared, many retail traders likely took
short positions, expecting a larger
reversal to ensue.
However, when the reversal did
not show, those same traders
were forced to cover
positions…en masse, thus
helping fuel the torrid bull candle
eight bars after our short signals
(Figure 2.3). Often, when false
signals surface, we see a slight
amount of "wiggle" shortly after,
while traders and institutions
attempt to decipher the reality of
the situation. As the dust begins
to settle though and traders
realize the technical indicator
was false, a sharp move occurs as
panic sets in. Again, the panic HIIV effect can be seen in Figure 2.3, eight
bars after the final false hangman short signal.
Mark Whistler • Volatility Illuminated • Page 37 of 363
The EUR/USD quickly (and sharply) rallied from the 1.3580 (roughly) area
to the 1.3680 region in one 30-minute bar.
For the EUR/USD the aforementioned pop is 'faster than usual', thus we
can infer many traders were caught going the wrong way.
What's more, Figure 2.3 also shows stochastics trending downward
during the bulk of the ensuing upward momentum, even after the false
signals appeared.
Does all of this mean technical indicators can no longer be trusted
whatsoever?
Not necessarily; however, there are a few critical points to consider.
Foremost, common sense tells us that most retail traders attempt to take
intraday positions, without taking much notice of long-term fundamentals.
What this means is many traders likely take positions against the larger-
trend, simply because their misunderstanding (or lack of will to do the
proper research) hinders the mass contingency of "at home traders" from
seeing the situation clearly. Moreover, retail traders often watch shorter-
term timeframes, more often than they take note of the 4-hour, daily,
weekly, and (even less often) monthly charts. Without a clue of the larger
technical and/or inherent fundamental pictures, they are really just
'trading blind.'

Finding Sanity within the

Chaos

What all of the previously mentioned translates to is an inferential

conclusion where technical indicators (at least those commonly used by
the mass army of retail traders) will provide false signals more often on
Mark Whistler • Volatility Illuminated • Page 38 of 363
shorter-term timeframes, over longer-term counterparts. Simply put, retail
traders who are taking positions on shorter-term intraday timeframes
(based on stock indicators), are actually making the situation worse, and
only adding to intraday volatility – even more. It's important to note retail
traders are not the sole blame for volatility, as many institutions can also
make silly decisions as well. What's more, in today's trading environment,
the historically transparent environment of fundamentals (GDP growth,
inflation, interest rates and underlying economic reports) have many
professional analysts scratching their heads with the added variables of
present and future national debt, credit related (out of the blue)
bombshells, inflation, deflation and risk aversion.
Thus, in the current Forex paradigm, the HIIV effect coupled with
fundamental uncertainty are creating the "perfect storm" for erratic
intraday movements and HIIV-derived volatility, contrary to traditional
market-movement common sense.
When coming to terms with the fact that technical indicators are -
indeed - failing in today's markets, many readers may perhaps be
wondering if there is any way to truly put the odds back on their side?
The answer is yes. The solution is three-fold. First, Retail traders can
help remove uncertainty by spending more time attempting to learn and
understand the larger fundamental paradigm, while also trying to perceive
where future fundamentals will land. By doing so, retail traders are
attempting to not only decipher why present volatility exists
fundamentally, but also map future possibilities for seemingly
unanticipated moves beyond today's price range.
Second, retail traders must also begin taking greater notice of
institutional indicators such as VWAP (and other benchmarks),
understanding that institutional order flow trumps all. Taking greater
notice of VWAP (and other benchmarks) could provide at-home traders
with superior insights into the institutional mindset and thus, potential
future price action.

Mark Whistler • Volatility Illuminated • Page 39 of 363

 Third, retail traders must take the time to understand the philosophical
and theoretical underpinnings of volatility/probability, while also seeing
how the dynamics of markets demand the application of the principals of
physics, helping put the odds of success back in their favor. All three
aforementioned points could be of great benefit in helping defeat false
technical signals, seemingly random price action, and the lack of
volume/order transparency retail traders are faced with daily.
With everything we've covered in Chapter Two in mind, please make
sure to remember common technical indicators (especially on shorter-term
timeframes) are providing greater amounts of false signals, with each
passing day.
It is arguable trading purely from technicals once allowed retail traders
to clearly see the fundamental paradigm unfolding via price action;
however, within today's Forex volatility, the bar for success has been
moved much, much higher.
All participants must now pay attention to fundamentals, institutional-
grade technicals, volatility/probability, and market-physics to truly trade
profitably in the constantly changing markets of the 21st century…all of
which we will cover in the upcoming chapters.

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 CHAPTER THREE
BEHIND THE CURTAIN

" Imagination can not only make people believe they

have done simple things that they have not done but
can also lead people to believe that they have
experienced more complex events."5
- Elizabeth F. Loftus

In Chapter Two, we discovered how and why technicals are prompting

false signals in today's markets. Really, I would be very shocked to learn
most readers were already aware of the failure(s) happening, and had
taken the time to identify specific instances of such, while also really
considering the 'philosophy behind' false signals in today's markets.

When I discussing failing indicators at speaking engagements, or

occasionally in educational Webinars, I generally always ask how many
people were aware of the situation. Surprisingly, many will indicate they
already had 'some notion' there was a problem; however, virtually none
have taken the time to investigate the matter more deeply themselves.

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 Really, we've become so 'default dependant' that we often do not
question what's happening behind the curtain, even something inside of us
is telling us we should. I'm not just talking about indicators, I'm talking
about the information we receive through media daily too… I'm even
talking about our own memories.

Throughout Chapter Three, you're going to see some concrete evidence

of why and how our own memories fail us from time to time. In addition,
we will also see how and how some of the information received daily from
media is not really telling us the full truth. The two together are a deadly
combination for investors and traders. To transcend the modern paradigm
of 'faulty information' potentially coming from inside our own minds
(propagated by external information and media), we must be willing to
look behind the curtain- always, even if we are part of the curtain, in and
of, ourselves.

The Philosophy of Looking

behind the Curtain, Even if
it's not Socially Appropriate

Information and memory failure are not only subjects that keep me up
at night, but were part of the motivation behind releasing the information
in this book, in the first place. Over the past few years, it feels as if I am
finding more and more evidence showing that even if one intuitively feels
the information they are receiving is faulted, hardly anyone actually takes
the time to investigate how and why the propaganda is flawed.

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 I think it must be like having a tick embedded in one's back… One
might know the little bugger is present after having spotted it in the mirror
after stepping out of the shower. However, because the little thing is so
hard to get to and because it's not overly bothersome at that moment, he or
she ignores it, hoping it will just go away. I would think the host would
ask another for help to remove the tick, which they cannot reach with their
own hands.

However, for many, actually asking another for help just seems
awkward, perhaps because for whatever reason, they're embarrassed that
the tick is there in the first place. Drawing attention to the annoyance just
seems too uncomfortable to approach. Here's the thing though, 'the tick'
could be carrying bacteria and every minute it is ignored, the greater the
probability the carrier could be infected with a malady like: Lyme Disease.

Let me tell you what I know about Lyme disease…

Just a few weeks after I first moved to East Hampton (at the tip of Long
Island) in 2008, I developed a funky little 'bulls-eye' rash on my shin. At
the time, I didn't think too much about it, as I figured it was likely just a
funky bruise from biking, or something. A few months later, I remember
going to bed one evening feeling a little strange, like I was just a 'more
tired' than usual.

I didn't get out of bed for five days…

I had no idea what was happening. Fact is, I had no idea I'd been bitten
in the first place… Prior to moving to East Hampton, I'd never lived any
place where Lyme disease was a threat, and thus, had no idea to even be
on the lookout for anything peculiar, much less actually able to recognize
possible symptoms. (Stay with me for a moment and you will understand
why this little story is so important to trading and our perception of
information.)

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 I finally pulled myself out of bed (feeling completely wrecked)
determined to find a doctor in my new hometown; however, I still didn't
know what the problem was… I remember thinking I must have caught a
wicked strain of flu or something… While searching for doctors online –
and just by dumb luck really – I stumbled on a Webpage detailing the
symptoms of Lyme disease. After only a few minutes of reading, I was
convinced Lyme disease was the problem, and thus, I suddenly felt
slightly better (at least) having some insight into the catalyst behind my
illness. Luckily, a great friend was there to help find a doctor who could
help and the next day I was treated with antibiotics.

I caught the Lyme infection early and after only seven days of
antibiotics, I was fine. However, for those who aren't able to properly
diagnose the condition, or ignore the symptoms completely… The effects
of Lyme disease (over the long haul) can be devastating.

Often, doctors unfamiliar with the illness misdiagnose Lyme disease as

Chronic Fatigue Syndrome. Their patents are mistreated and
eventually…end up feeling the full force of the bacteria overtaking their
bodies.

The point behind all of this is very, very important. If you can't read
the symptoms, you can't diagnose the illness. The bull's-eye rash on my
shin was a dead giveaway that Lyme disease was present for anyone
who'd seen one before, or if they had been educated on such matters. In
my case, however, I had never lived anywhere the disease (or ticks) were
present and had never been educated on symptoms or preventative
measures.

Fact is, because I didn't even have a clue of the possible danger lurking,
even when a symptom blatantly showed up on my own body.

Here's what's so important about this little story… The increased

volatility of today's markets is a symptom of unclear and misleading
information, nervousness of the investing public and troublesome

Mark Whistler • Volatility Illuminated • Page 44 of 363

economic and business conditions. In addition, increased volatility within
today's markets is also a symptom of a larger problem whereby
individuals, traders and even institutions are not able to clearly and
accurately find confidence in markets. Bad information is the bacteria in
the bloodstream. Also, remember in the close of Chapter Two, when I
mentioned VWAP (an indicator of institutional movement) as not readily
available in most retail platforms… Just another example of how the retail
trader is not only missing vital information, but perhaps not even aware
the missing information exists at all.

I have to ask another question now, though it might seem a little odd…

On a personal level, is it possible your perception of markets is flawed,

or even worse…

Your own memory might be failing you right now, and you don't even
know it?

Don't laugh… I'm serious, 'just what if?'

Do you believe most of what media delivers – news, polls and opinions
– is/are true and valid? What about financial news? Moreover, do you
believe your memories of past financial news and events are rock solid?

Chapter Three is geared to soften hardened and cynical hearts, while

cracking open the most riotous brains to the possible paradigm- that we
might all be snowed.

As competent adults, friends, husbands, wives, analysts, traders,

executives and market participants- overall, we like to think of our minds
as rational, with little error. What I'm talking about is personal confidence
in our recollection and perception of past, present and future reality. But
what if…

Mark Whistler • Volatility Illuminated • Page 45 of 363

 What if some of the things we think we know as real - were never real
in the first place? How many of us could actually admit to ourselves (or
others) that even though we believe we are mentally adept, we were, and
perhaps still are, wrong about our own memories even.

I'm not just talking about trading psychology here, I'm also talking
about human psychology…

Perhaps what I'm about to show is part of the reason hardly anyone
really knew the financial crisis was coming. I know plenty of guys who
currently tout 'they called it all along' and 'they knew something was wrong
way beforehand', but do not have any extra zero's in their bank and/or
trading accounts to actually prove it.

Yet, they all seem to have perfect 20/20 hindsight. Out of the
thousands of professional and retail traders I know – only one trader that I
know of – placed a bet in markets before the crisis started…

My friend Carl purchased index put options ahead of October of 2008,

specifically because he foresaw a greater problem stirring in markets, than
most perceived.

I'll never forget the day in October 2008 when Carl called with news of
his windfall. He is the only trader I know of who actually took action on
the information his intuition was picking up on. All of the other traders,
they're just kidding themselves. They didn't see it coming ahead of time,
or they would have made money, but that won't stop them from telling
you differently.

Now, I would like to give you an example of how the information we

receive from markets – and from ourselves – could be flawed. To do so, I
must back up in time and tell you about a market event – as it unfolded in
my life…

Mark Whistler • Volatility Illuminated • Page 46 of 363

The Story of Black MONDAY -
1987

Do you remember the crash? I hate to admit this, but I was only in high
school… I do remember the crash though, because my father traded
futures actively. One afternoon when he picked me up from school, he
seemed lost in thought. The day was Monday, October 19, 1987 – the day
the Dow Jones Industrial Average (DJIA) barfed 508 points, or 22.6%.
During the majority of my high school years, every Monday my old
man would pick me up after the final bell and we'd go have a burger and
talk, you know- man to man.
He'd then drop me back of at school for tennis, wrestling, or whatever
other practice I needed to make it to…
I have to say though, those Mondays sucked. I'm kidding really, as my
old man is gone now and I'd give a ton to have just one of those Monday's
back…
Back then, however, I didn't feel quite the same. Every Monday, as the
end of classes would near; I'd consider finding a bus to throw myself
under, just after the final bell let out. See, the entire Monday ritual with
my father was about more than just having a burger and chatting; I was
also required to hand over a piece of paper containing all of my grades (I
wasn't the best student); freshly signed by each of my teachers. Every
week, good old Mark got more than a burger; Mark received a well-done
earful about his hideous grades, always in the middle of a restaurant.
October 19th, 1987 was very different from all the other Monday's
though... On Black Monday, My old man– the speculator, the stock
operator, the futures trader and the aerobatics pilot…never asked to see

Mark Whistler • Volatility Illuminated • Page 47 of 363

my grades. As we sat down to eat in the old 1950's Deco diner, he was
studying one thing and one thing only: The Wall Street Journal. But the
paper wasn't fresh from a store, it looked well worked over, as he'd been
writing on it all day. There were notes everywhere: calculations, ratios,
lists, letters and as I recall, even a few items circled with curse words
scribbled to the side.
The burger joint was deserted - just enough - that I remember hearing
the ceiling fans rocking back and forth over the soft clamor of a mid-
afternoon shift change in the background.
Dave ordered a cup of coffee (black) from behind his paper; I ordered a
Stewart's root beer. Do you remember? The kind that comes in a bottle,
with orange swirly writing on the neck, stamped with '1924'.
My brew arrived with a straw and my old man's Joe- gorging in cream
and sugar. I remember him looking over the paper at me (I was waiting
for the grade card demand), down at his mug filled with cream and sugar,
to the side, and then to our gum-smacking server, who was already on her
way back to the kitchen. I'm not sure if he smiled or sneered, but he drank
the blunder anyway.
Silence was all I had with my burger that day, as I watched Dave's same
dish toil in abandon at the edge of the table. Silence –dead silence– like the
kind where you're cautious not to swallow too loud.
As I was eating, I unconsciously reached for my Stewart's. As I was
siphoning the last bit of soda, I accidentally made a huge schlurgle sound,
the kind that only comes from a straw. Normally, a schlurgle would not
have been a big deal; today though, the schlurgle was like dropping a piano
in morgue…
Words cannot describe the displeased look the grade-czar shot across
the table- just after I'd broken his concentration with my noisy mouthful of
root beer. I think I made my first official trade at that moment; I'm pretty
sure I was long and strong all of the 'run for your life' calls in the entire
world.

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 Just at the moment I thought Mr. Financial Paper gawker-atter (and
International king of staring contests) was about toss me and my empty
bottle of Stewart's all the way to Africa, he suddenly diverted his peepers
over my shoulder. Thankfully, the waitress had decided to check on his
uneaten hammy. Saved by the forgotten burger; talk about a bull market!
Before she could say anything though, he'd already shook her off like a
pitcher does a curve ball.
Then, unexpectedly- he called back after her…
"Get the hoodlum market-maker another stout, please would you."
"Whoa! Did Dave just order another Stewart's?" I recall my next thought as,
"this is a setup for sure… No doubt about it, I'm leaving in a body bag."
"C'mere, I want to show you some things…" That's all he said while the
waitress was acquiring another bottle of suds… Even after he ordered the
second soda, I have to admit, I waited a few moments before moving over
to the chair next to him. My old man was a great guy, but the second soda
order was definitely out of place for our Monday talks… Taking my new
seat, I looked up just in time to catch the waitress winking at my old man.

Mark Whistler • Volatility Illuminated • Page 49 of 363

 His face remained stone cold.
Then he began, "Today, you learn about life, money, fear,
greed and most of all…opportunity." Over the next few
hours (and like six more Stewart's!), he explained
everything he possibly could about Black Monday.

We talked about principals of psychology,

markets, stocks, trading, order flow, how market
makers stopped picking up phones, futures,
derivatives, economics, common sense, mass herd
mentality, media Chicken Little, global money shifts,
and most of all…the thing he pounded into my head
over and over…
"Mark," he looked directly into my eyes in a way
that let me know I was about to hear something very,
very important, "today, Black Monday… It will come
again in your lifetime…once, maybe twice…"
He paused for a moment and then nodded in quiet
kind of way with a content smile, before turning back,
"you'd better be looking for it, because it's going to happen
– eventually - and most people will be caught off guard."
Then he smiled again, "You should be able to make money on the way down,
but if you miss it – while most people are running scared from newspaper
headlines, you should be looking for some of the greatest opportunities- to be
presented in decades."
In my entire life, I can't remember a more memorable afternoon than
Black Monday with my pop.
That afternoon, I think we both suddenly figured out that while I
wasn't the most punctual student, markets touched my soul in a way my
classes never had. I don't know why, but I just got it. That dark day of
market devastation with my father, I became a stock operator forever. I
was born a speculator from the crash of 1987.

Mark Whistler • Volatility Illuminated • Page 50 of 363

 I can't remember everything my old man said that Monday, but I do
vividly recall him also speaking in terms of gravity, airplane engines,
speed, aerodynamics, weather, instruments… All in context of markets,
but in terms I'd already come to know from him– flying. The trader
turned aerobatics pilot, my old man, my father, Dave, made sure to
present the information in concepts I'd already learned, to help it all sink
in.
Occasionally, I wonder if 58 years beforehand, another young guy possibly
made the same mistake of loudly schlurping the last swig of root beer too…while
in the company of his father, recoiling from the aftermath of Black Tuesday, 1929.
Today, when I drink a root beer, I think of the crash of 1987 and how in
an ironic way, the historical global market plunge was really the
conception of my life's path. My old man died in his plane a few years
after on July 4, Independence Day… That might seem like a little more
information than is required here, but it taught me something else…
If you're going to love something, love it all the way- and never give
up.
I sometimes wonder if my life would have taken another turn, if the
crash of 1987 had never occurred. Maybe I'd just be shining shoes for a
living now.
It doesn't really matter though- whether we're traders or shoe shiners,
because eventually a crash is going to catch us all…unless we can see it
coming beforehand.
But to perceive the future… We have to be certain of the past…

Mark Whistler • Volatility Illuminated • Page 51 of 363

 The CONFESSION of MASS
MEMORY FAILURE

There's a point to the entire story you just read…

Presenting a little insight into where I'm headed with all of the
aforementioned mumbo jumbo; we must all question not only the
information we receive daily, but our own memories as well. In short-
while so many of us believe that our recollection of historical events within
our own lives is infallible, the empirical evidence on the table could be
saying something incredibly different.
Shortly after the turn of the present century, an article appeared in the
UK Guardian where writer Claire Cozens penned, "A group of US scientists
has discovered that advertising can alter people's childhood memories, making
them remember events that never happened."6
The above excerpt is specifically referring to the 2002 study by Kathryn
A. Braun of Harvard Business School, Rhiannon Ellis of University of
Pittsburgh and Elizabeth F. Loftus of University of Washington titled:
Make My Memory: How Advertising Campaigns Can Change Our
Memories of the Past.7
In the study, the authors assert:
"But times are changing, and some marketers are beginning to realize that
memories are constructive. Some have even benefited from the fact that
their consumers' memories have been manufactured. Take, for example,
Stewart's root beer. They report many adults seem to remember
growing up drinking Stewart's frosty root beer in bottles. This is
impossible, because the company only began full-scale distribution

Mark Whistler • Volatility Illuminated • Page 52 of 363

 10 years ago, and prior to that only fountain drinks were available.
It could be that glass bottles adorned with sayings like 'original' 'old-
fashioned' and 'since 1924' provide consumers the illusion of a past that
they might have shared as a child. In fact, the vice president of Stewart's
marketing swears he remembers drinking their soda after Little League
games in an area where distribution was unlikely, but admits, 'Memories
are always better when they're embellished' (Prince, 2000)."
Fact is, I never drank Stewart's root beer in my childhood and neither
did any reader here, unless you specifically went to one of the Stewart's
soda fountains, or you're under the age of 19, as of 2009. 8
However, while all of the story about my father and Black Monday is
absolutely true (to the best of my memory), the fact that I really do seem to
remember drinking Stewart's root beer on the afternoon of the 1987 crash,
shows that we are all fallible to memory inconsistencies. Here's the thing-
I would have likely gone through my entire life thinking I was drinking
Stewart's root beer in my childhood, had I not come across Loftus' article
in my research. Really, I had no reason to even question my own memory,
especially about such trivial things such as the type of soda I drank in my
childhood. However, now that Pandora's box is open, a little detail like a
memory of root beer brings up many, many larger questions.
I'm not talking about questions about the solidity of my memory, as I'm
pretty sure most of it is in pretty good shape; what I am discussing here is
that my 'little slip' of a minor detail- when coupled with millions of
forgotten 'minor details' by the mass investing public…might really be a
much larger problem. As I write this, I am truly wondering how many
readers believe they personally could never have any 'itty' inconsistencies
in their memories?
My direct question is this: I have admitted my memory is flawed, can
you?
The thing is, until I stumbled on the research from Loftus, I would have
never even thought to question the memory I was holding in my own
mind, as flawed… Much like when I first noticed the little bulls-eye bruise
on my shin, I no idea to even consider the possibility of Lyme Disease…
Mark Whistler • Volatility Illuminated • Page 53 of 363
 Fact is, the greatest threats to our health, our success, our livelihood
and our longevity…often stem from events, happenings, understanding(s)
and occurrences inside of our own minds and bodies, which we are not
aware of.
True, the tick was an external catalyst poisoning my body, however, the
inability to recognize the symptoms was a failure in my knowledge, mind
and constitution in that I had not even taken five seconds to consider the
inherent dangers I should be cautious of in my new surroundings… I can
blame the tick forever, or I can take responsibility for not having
proactively sought out the tick, before the tick found me.
After I read the article by Loftus (and almost all of her downloadable work
on the University of Washington Website, which I highly recommend), I took the
afternoon off and simply went for a long walk. Though my mind (for
whatever reason) still sees a Stewart's root beer bottle in my hand almost
twenty-two years ago, the evidence at hand has presented a different truth,
which I absolutely must accept, even if by doing so, I am admitting to
myself that my own memory is sometimes flawed.
I can say with confidence that my memory of drinking root beer on the
afternoon in 1987 is valid; however, I must admit that the detail of the
brand is not. Interestingly, as Loftus shows in her work, much of modern
memory failure may actually be propagated by advertising… What's
more, her studies also show that memory failure is not only real, but
devastating to many who have been accused (and convicted) of a major
crime, even though they were truly innocent. (More on this in a
moment…)
My next question to you is this: How can market participants trust
their memories of the trading and economic events from yesterday, if
modern research is proving our memories are highly capable of failing?
Would you believe memory failure is so plausible that real adults could
even misplace reminiscences of Mickey Mouse and Bugs Bunny? What
about those who 'swear on the Bible' in Federal court?

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 Claire Cozens of the UK Guardian
also wrote: "Adults shown a mock advert
in which Disney World visitors shake
hands with a Bugs Bunny character
became convinced they had done the same
as a child.
But shaking hands with the famous
cartoon character could never have
happened because the giant rabbit is a
Warner Bros creation and does not feature
in any Disney theme parks."
What I'm really trying to hammer
home here is our memories can deceive
us… all of us.
Just when we thought we had 'steel
traps' for minds, another paradigm surfaces encouraging all of us to
question what we remember (and believe) in our own minds.

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 A date WITH Blind Devotion

You may have heard the cliché; Wall Street has a short memory… Well
your damn right it does and so do investors who keep coming back time-
and-time-again to eat poison apples from the same damn tree that put
them in the hospital only a short while ago.
Fact is, when markets begin to move (mortgage markets, dot com
stocks, commodities stocks- the likely upcoming REIT penny stock surge,
whatever…) the masses seemingly perceive the potential to make a few
bucks, and as momentum begets momentum, suddenly become infected
with (what I like to call) exuberance-induced-amnesia… Joey-Q-Public lines
up one more time to take on the same reckless and misinformed
investments all over again.
Remember the Internet stock market dump at the turn of the present
century? The only difference between the dotcom.bomb and the recent
mortgage crisis was instead of owning paper, the same exuberant 'want
rich, will buy blind-quick' mass investing public rotated what was left of
their wealth from ravaged tech stocks into houses. The same investors
went back for the same poisoned fruit (in a different wrapper), thinking it
couldn't possibly be venomous again.
But it was…
And it will be…
And they will go back for more- again and again and again…
Why?
Because their memories and deeper understanding of the situation are
not only synthetic and flawed, but manufactured from media, as well.

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 I seriously challenge you to ask your colleagues, family and friends
what the dotcom.bomb was all about?
I'd bet you will receive answers with sounds of 'artificially inflated'
and/or 'overvalued Internet stocks', perhaps 'Enron', and most likely:
'daytraders'.
On Wikipedia.com, there's a page titled Dot-com Bubble, which cites
the main reasons for the whole debacle as, "A combination of rapidly
increasing stock prices, individual speculation in stocks, and widely available
venture capital created an exuberant environment in which many of these
businesses dismissed standard business models, focusing on increasing market
share at the expense of the bottom line."9
Please read the above explanation one more time, I'm going to point out
something huge in just a moment.
Moving on, please take a moment to read the first line of the paragraph
following the passage you just read: "The venture capitalists saw record-
setting rises in stock valuations of dot-com companies, and therefore moved faster
and with less caution than usual, choosing to mitigate the risk by starting many
contenders and letting the market decide which would succeed."
Here's what we have to understand. In the first statement, the only
mention of Joey-Q-Public's personal responsibility is 'individual
speculation in stocks'. Then, in the second statement -the big explanation-
the blame is clearly headed in one direction: Venture capitalists.
Just like Stewart's root beer product placement influences memory and
just like pictures of Bugs Bunny at Disney Land influence memory-
mainstream media always finds an escape goat for tragic events in
markets, which is/are the only things investors really remember, after the
fact. In essence, just like I can't remember clearly whether it was Stewart's
I was drinking on October 19, 1987, investors can't, don't, or don't want to
remember they were individually the ones who bought their
dotbomb.com stocks in an exuberant greed-fueled-feeding-frenzy. The
bottom line is, because media recollection of the event now directs blame
at overzealous Internet entrepreneurs, greedy venture capitalists and

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daytraders, most people have replaced their personal responsibility and
reality of the situation with the manufactured memories delivered by
Internet, television, print and radio. The 'product placement' here is that of
'shift the blame', where investors forget he and/or she were (and are)
responsible for their own losses, by buying into the hype in the first place.
Why does this happen? Why is manufactured memory the accepted
standard?
Foremost, information is everything.
Take a moment to look at the larger outline of the Wikipedia article…
1 The growth of the bubble
2 Soaring stocks
3 Free spending
4 The "Bubble Bursts"
5 Aftermath
6 The Transition of the Bubbles
7 List of companies significant to the bubble
8 See also
8.1 Terminology
8.2 Media
8.3 Venture Capital
8.4 Economic Downturn
9 Further reading
10 References
11 External links

Little 8.2 'Media' is nothing more than three reference links at the END
of the article…
The links are:

 e-Dreams
 SatireWire
 Startup.com

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 I don't want you to think I'm shifting blame here, because I'm
absolutely not. Individuals are solely responsible for their own investment
decisions.
Period. However, based on the previously mentioned article, we can
also assume two critical points – one intuitively and one empirically:

1. Empirical – As Loftus' studies show, human memories are not only

capable of error- but are pregnable. (FYI, for those who are not yet
believers, I will present even more evidence in just a moment.)
2. Intuitive - On the whole, people are lazy, greedy, move in herds,
credulously believe media, are addicted to exuberance, and frankly, never
question anything unless the same media actually tells them to question
such.
I encourage you to look beyond my above Wikipedia cite regarding for
a greater dotcom.bomb explanation. Please Google the term. You will not
likely find a substantially wide variety of truthful explanations.
What's more, the register of explanatory articles is seemingly devoid of
pieces covering how media predominantly promoted, hyped, exaggerated,
publicized fueled, and inflated the whole Internet stock mess.
If historical coverage of the event seemingly absolves media from any
responsibility –as playing a major part in the catalyst of the Internet
bubble- does that mean mainstream financial (and non) media wasn't a
huge part of the problem? Will the masses forget the circuslike 'pitchman'
role financial media played throughout the whole event?
Perhaps they already have.
Speaking of memories, do you remember in Chapter One, when I
mentioned the 50,000 watt mega-media-mouth bulb? Well here's the
thing- Financial media is always the first in line to promote any bubble
whatsoever, because the bubble itself is exuberance, and exuberance
means ratings, and ratings mean advertising dollars. Exuberance equals
revenue for media.
What's more, when appearing on television, pundits are often told to
ramp up the tone of the discussion…

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 And because pundits want and need exposure they do. Here's an
example -a VERY real example- of how I know, from the inside… Just so
you know though, I am not going to mention the network's name, as I
don't want to have to use all of the proceeds from this book fighting a
lawsuit. Nevertheless, here's what most people don't see…
Pundits are contacted by producers to appear on news and talk shows
based on expert status, producers exchanging information with one
another, inside station 'go to' lists and/or if the pundit happens to be in the
middle of news, or has produced news (like an article for a major financial
Website) of notable mention.
Sometimes, the Producers will call the evening before to notify the
Pundits that they are invited to appear, though most often; the calls come
in last minute just hours before the slot. (By the way, usually there is no
compensation for appearing on CNBC, FOX Business, or various other
networks, as an outside contributor, the trade is exposure for time.) The
producer briefs you on the subject you will be speaking on- sometimes
providing a little reading material, or questions; however, more often than
not- the pundit is only aware of the subject and intended scope of
discussion. And that's okay, after all, pundits are supposed to be experts.
But here's what many might be surprised at… On more than one
occasion, I have actually been told to 'really speak out' and even 'argue
fiercely'. What the average Joe doesn't know (sitting front-side of the
television), is this:
 Producers know what they want and they know who they can get it
from.
 Pundits who do not play ball- do not come back.
 If you are told to argue, you argue.
 If you are told to be loud, you are loud.
I encourage you to watch the financial news with a fresh set of eyes.
Are the commentators and pundits seemingly excited and/or speaking

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above one's normal 'inside voice?' (Key network personalities generally do
not have to play the same game of fetch, just FYI)
Are there multiple participants in the studio, who seemingly 'debate' or
almost 'argue' opinions, even though it seems like there's not much to
argue about?
Do you think the elevated levels in their voices are purely because they
are passionate about markets?
Alternatively, is it possible the producer perhaps guided the 'energy
level' of the segment, or show beforehand? You better believe it.
Is yelling 'fire' in a crowded movie theatre effective?
 You better believe it.
 People move fast when they're fearful…or in the case of exuberance:
hungry.
There are two problems with yelling fire though:
1. Unless you want to go to jail, you have to find someone to blame
your outburst on…
2. If you do get away with yelling 'fire' in a crowded theater (which
you most likely will, because it's dark and the patrons are paying
attention to something else really), if and when you do it again, you're
going to have to yell even louder, because you've already pulled the
stunt once. The savvy stampede starter might switch up his tactic to
something like:
'Look out! He's got a gun!'
Same thing - different wrapper.
(By the way, I'm not very good at manufacturing emotion – and thus, the
networks don't call very often anymore.)
In my research on the dotcom.bomb explanations easily available on
the Internet, there was one excellent article that came up on the #1 Google
search page that deserves significant mention…

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 The article was published on April 24, 2000 in New York Magazine;
arguably not a mainstream source of financial news. (Taking note of the
article's date, the words were penned in the heat of the moment and have a
significantly different tone than Wikipedia's reflection.)
The subheading of Michael Wolff's article Dot-Com Bomb reads:
"We've all been waiting for the next Great Web Wipeout. But the Orwellian
technology geeks never imagined the fuse would be lit by an old-media
magazine article."10
The first thought that comes to mind is, "Here's a guy who really get's it,"
meaning our love affair with media-fueled exuberance.

Wolff asserts:
"Mania is always a pure play. It's reality confusion. It's blind devotion. It's
a media thing.
To me, the key constants of this manic phase have been the vast,
astounding, messianic, mesmerizing certainty on the part of technology-
industry people on the West Coast (together with their cursed, Orwellian
language) side by side with the profound insecurity on the part of the
media that has reported the Internet story. While stupid about technology,
stupid about finance, stupid about the nature of the hype itself, these
people (we people) have been absolutely willing to believe."
Wolff's writing is just brilliant…
I believe he should be given a gold medal for the words:
"It's reality confusion. It's blind devotion."

At the heart of the issue, blind devotion means total and complete
unquestioning trust, completely forgetting the events of the past.
Forgetting the confusion created on the way up (and then on the way down as
well), by the same 50,000-watt-mega-fog-mouths' only a few hours, days,
months, or years ago.

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 What the 'mega-fog-mouths' will not do -ever- is publicly admit they were
part of the problem.

Wolff caps the statement with the words, "stupid about the nature of the
hype itself, these people (we people) have been absolutely willing to believe."
Dear readers, what will you remember about the financial crisis three months,
six months, and even five years from now? With so much information coming at
you from all angles (national debt, credit swaps, predatory lending, GDP loss,
global tribulations, asset nationalization, reckless spending, woefully high
unemployment and foreclosure rates), what will you really remember- especially
when considering all of the information you haven't even received yet… I can tell
you one thing for certain; as markets truly start to recover, who do you think the
first 'pitchmen' to talk it up will be? Yup- media. You will then be bombarded
with a completely new suitcase of information…and memories. In six months,
nine months, or a year, will you really remember the events in detail – other than
retrospective mega-fog-mouth headlines?
If you do forget a year from now, fret not, I can guarantee you media will
provide you with a fresh serving of 'retrospective specials', just to jog your
memory. Perhaps help re-create your memory. Oops, did I just say that? I'm
sorry, like media, I can't remember what I just said, even though I just said it.
Let's focus on something else though…let's focus on you becoming a
millionaire.
Let's focus on how much money you can make trading…
How much money you can make right now.
I mean right now.
I know three stocks, all under $5, that will triple in the next thirty days. Here
they are:

1. Nasdaq: IJCTSW – I Just Changed The Subject With…

Mark Whistler • Volatility Illuminated • Page 63 of 363

 2. NYSE: ESYWF – Exuberance, So You Would Forget
3. OTCBB: MPS – My Previous Statement.
Fear and exuberance are tactics commonly used to divert one's memory from
five seconds ago, to what could happen a few moments from now… Good
financial writers know it – effective media knows it…
I hope you do too.
Please take a moment to consider the following excerpts from two
separate articles by Elizabeth Loftus –
In the 2003 article Our Changeable Memories: Legal and Practical
Implications (Nature Reviews: Neuroscience), Loftus states, "The history of
the United States justice system, like those of other countries, is littered with
wrongful convictions made on the basis of mistaken memories.11 Huff recently
estimated that about 7,500 people arrested for serious crimes were wrongly
convicted in the United States in 1999. He further noted that the rate is
thought to be much lower in Great Britain, Canada, Australia, New Zealand and
many other nations, especially those that have established procedures for
reviewing cases involving the potential of wrongful conviction. "12

And also…

"The U.S. Department of Justice released a 1996 report after analyzing 28

cases of DNA exonerations and concluding that 80 percent of these innocent
people had been convicted because of faulty eyewitness memory."13
The reason I've placed the above two quotes from Loftus in this book- is
because I want traders to understand that if people who are swearing on
oath…in a court of law are potentially falling victim to memory failure…
It IS plausible our recollection of similar technical signals, or market
conditions that may have surfaced two weeks ago…could be wrong. In
addition, it is possible the hyped (regurgitated and fresh) news we take in
daily is altering our memory of the past, and thus, our perceptions of the
present…and future.

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 Given the massive ramifications of accusing someone of a crime while
on the stand (meaning an innocent person could go to jail for a long, long
time), we can infer the witness was either almost one hundred percent
sure their memory was correct, had some other type of mental, or
psychological defect to allow such to occur. Alternatively, perhaps –
somehow- their memory was artificially altered… Aliens did it.
Just kidding. In reality, as Loftus research shows, the power of
suggestion (in recollection) can change what we remember about –and
how we recall- past events.
On another note, media is often the 'psychological defect' witness I just
mentioned, in that media has no problem accusing anyone, and everyone,
else to divert attention from their own participation in the crime spree,
metaphorically speaking.
Investors who continually go for the same poisonous apples -
repeatedly- either do not know their memories have been impregnated, or
sadly, cannot and/or will not find the personal courage and strength stop
the vicious cycle of blind devotion to media. In essence, the acceptance of
blind devotion is admittance to not only historically believing in, but also having
(consciously) allowed our memories to have been manufactured by synthetic
sources.
One would think nonchalantly believing in a hyped hot stock tip, or
media touting of an economic number intraday is one thing, however,
recalling a false memory in a court of law would likely see a much more
serious 'other' requiring significantly greater consideration and
importance.
However, because it is proven human memories can fail in a court of
law, where there are potentially dire consequences, what does the
evidence of such fallibility mean about the plethora of less important
information we're constantly receiving every day?
By the way, somewhere buried in this chapter is a good explanation for
why I lose my keys every three days…. Kidding…well…somewhat
anyway.

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 Beyond the paradigm of our memories as fallible, there could be
another 'add-on' to the entire situation- making matters even worse…
What if the information we receive daily isn't even precisely correct in
the first place?
Given that we have just clarified there is indeed considerable possibility
that our memories can fall victim to 'manufactured recap' (based on media
tributes, or revisits), what are the chances of correctly analyzing history to
make accurate decisions (today) if the information was flawed from the
start? Even more worrisome, what if almost no one had any clue that
information was flawed from day one?
There's just no way the masses – investors and media – could be that
blind, is there?
If the information we have accepted as truth– suddenly presents
another picture, how many would honestly accept the reality of the new
situation and how many would actually attempt to justify the previously
accepted untruth?
Part of the current volatility paradigm within markets is that of the
public's mass anxiety in reaction to events, propelled by media… Like all
the quiet warnings of a pending credit disaster –-prior to the fall of 2008,
most investors and traders ignored the possibility…until it became front-
page news.
However, by then it was too late and those 'in the know' had already
profited and/or exited positions, precisely at the moment common
investors were coming to terms with the realization the apples they had
eaten (again) were poisoned.
Before we delve into the next section further examining 'how memory
is contaminated' I would like encourage all readers to take some time to
explore Loftus' work. Readers can find multiple articles and resources on
memory failure, along with links to Loftus' three books on her University
of Washington Webpage.
For additional information, please visit:

Mark Whistler • Volatility Illuminated • Page 66 of 363

 http://faculty.washington.edu/eloftus/
I firmly believe Loftus' research is nothing less than 'game-changing' and
I sincerely hope she receives a Nobel Prize for her efforts - seriously.

Media Made Maladaptive

Memory

Please take a moment to read the following statement by Loftus closely:

"More specifically, when people experience some actual event—say a crime or an
accident—they often later acquire new information about the event. This new
information can contaminate the memory."14
Let me ask you a few questions…
 Have you ever lost when trading?
 Have you ever watched as your portfolio freaked out in a global
financial crisis?
 Have you ever seen the Dow Jones Industrial Average plummet from
over 14,000 to under 8,000 in a matter of months?
 Have you ever witnessed excessive volatility within Forex that either
manifested, or accelerated a loss?
If you are an active trader, you likely answered yes to all of the above
questions. I would like to present the possibility that after-the-fact
'manufactured memory' often plays a significant role in many traders' ability
to adapt to, evolve with, and overcome volatility, when markets change
paradigms. In essence, the average trader's (and mass public's) inability to

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rapidly adjust to continually shifting market conditions is derived from two
sources:
1. Maladaptive fear and blind devotion.
2. Lack of knowledge and experience.
For the duration of Chapter 3, we're only going to focus on #1 above,
maladaptive fear and blind devotion.
(The totality of Volatility Illuminated is geared to help overcome #2.)
For those who are not familiar, 'maladaptive fear' is a type of unnecessary,
manmade bad fear, which is often harmful in our lives. On the other hand, 'good
fear' is known as adaptive fear. Again, 'bad fear' is termed maladaptive fear.
As a working definition, "Adaptive fear is a nuanced emotion that diminishes
during times of relative safety, while maladaptive fear lurks beneath the surface
all the time, quick to make its presence known whenever there is discomfort, the
unknown, or change."15
Maladaptive fear is really the product of a traumatizing circumstance, where
after a devastating event has taken place in our lives, when faced with a similar
situation (or possibility of), our brains and bodies manufacture the symptoms of
biological fear, even though nothing is truly 'to be feared' at all.

In the book, Injuries in Athletics: Causes and Consequences author Semyon

Slobounov states, "fear is one of the major components of psychological trauma
that may or may not develop as a result of traumatic injury."
The importance of the previous statement rests within the words, "as a result
of."
Maladaptive fear or conditioned fear is a byproduct of an event that can
literally alter our brain chemistry to react to future events. Again, bad fear is
separate from adaptive or healthy fear, in that when we are feeling adaptive fear,
we are (literally) usually faced with physical peril.
Specifically, according to Rosen & Schulkin (1998) "Fear responses (e.g.,
freezing, alarm, heart rate and blood pressure changes, and increased vigilance)
are functionally adaptive behavioral and perceptual responses elicited during

Mark Whistler • Volatility Illuminated • Page 68 of 363

danger to facilitate appropriate defensive responses that can reduce danger or
injury (e.g., escape and avoidance).
However, pathologic anxiety, as a form of an exaggerated fear state, may
develop from adaptive fear states as well. If that happens, the hyperexcitability of
fear circuits that include several brain structures…"16
I cut off the sentence a little there, as the passage delves into brain chemistry
terminology (if you'd like to continue reading, please see the endnote); the point
is that beyond our normal 'healthy fear' levels, constant upsurges of the adaptive
fear state can mutate into maladaptive fear, where we begin to feel anxiety and
fear (constantly) even when we really don't have anything to truly fear at all.
Do you think media plays a significant role in pushing the greater
public into a state of maladaptive fear?
You should – but you should also know media does the same with
'maladaptive exuberance' too.
In essence, a maladaptive state is where we perceive current events as
correlated, or will possibly have the same outcome as previous –
traumatizing – events, even though the current event is completely
independent from the previous event.
But maladaptive fear cannot exist without first having a trauma take
place…
In the case of media, the trauma does not always have to come in the
form of 'instant shock', like 9/11 (every single person I know –including me-
was literally glued to the tube) or the financial crisis, as a slightly duller
example. However, the trauma can be a slow, grinding campaign of fear,
or exuberance propaganda.
Why do you think the evening news is filled with so much negative
crap? Because as a society we not only buy into it big time, but also have
become addicted to needing to know the negative crap, so we're not
blindsided by trauma.
But the trauma is the slow creation and conditioning of maladaptive
fear by the daily negativity and fear grinding. If you're always worried
about something, you're likely trusting of the anyone has an 'in' to

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information, or news that helps alleviate your anxiety, or make you feel
safe, by presenting you with more information about negative information.
Case in point: I've randomly pulled two screenshots from major news
Websites … (I've left their names out as I try to avoid a lawsuit for the second
time in this book.)
Again, I did NOT search for the news, I simply hit two major websites
as I was writing these words and snapped the screens with no doctoring,
or digging to manufacture evidence. The point, as you will notice on the
following page, 70 to 90 percent of the information we're being fed by
media today- is fear based wretchedness. However, the same fear
peddlers will likely change their campaigns into exuberance-based
wretchedness, just after enough of the fear junk has been deployed so that
the public is well conditioned into a reasonably stable state of constant
anxiety…
(By the way, I pulled the two following images only minutes apart –
from different continents – to show fear-media isn't just American, it's
global.)
In the first example from a major European publication, nine of the 11
headlines are CLEARLY negative…

That's 81% negativity in terms of the information delivered at the

moment the screenshot was taken.
(I grabbed the headlines on May 27, 2009 – just FYI)

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 It's amazing…scary…and devastating to see the maladaptive anxiety
conditioning paradigm in action.

Figure 3.4

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 Figure 3.5

The above major U.S. publication is slightly better in the fear

department; however, 65% of the headlines are still negative.
All of this leads us to Media Made Maladaptive Memory (MMMM)
Media Made Maladaptive Memory is created through the conditioned
acceptance of hype, negativity and/or whatever else we are being pitched
at every moment by media that is seemingly imperative to our immediate
protection or well-being, but is really doing nothing more than creating
un-necessary anxiety.
(By the way false Media Made Maladaptive Memory is not a professional
term- it is my term, which I made up to try to explain the entire paradigm in
greater detail. I'm only telling you, because I hope to be a part of the solution, not
a cog in the larger problem and I don't want you to think I'm citing a professional
psychology term, when I'm not.)
Here's what I'm saying though: mainstream 'modern' media is possibly
creating maladaptive fear (and anxiety) within the masses, who are
constantly begrudged with fright, panic and dread through televisions, the
Internet, radio and newspapers.

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 I ask, is the constant bombardment of negative, or almost synthetically
positive (exuberant) headlines a form of intimidation in and of itself? I
thought public intimidation was illegal, though perhaps I'm wrong.
I seem to remember reading something about civil rights somewhere…
Perhaps it was Title 18 of the U.S. Code Section 241, Conspiracy Against
Rights, that said something like, "This statute makes it unlawful for two or
more persons to conspire to injure, oppress, threaten, or intimidate any person of
any state, territory or district in the free exercise or enjoyment of any right or
privilege secured to him/her by the Constitution or the laws of the United States,
(or because of his/her having exercised the same)."17
Honestly though, I can't remember exactly what it said…
Merriam-Webster dictionary defines intimidation: "intimidate, cow,
bulldoze, bully, browbeat mean to frighten into submission."18
Here's what I'm not doing: Insinuating whatsoever that media is
breaking any laws, after all, this is America and media has the right to free
speech, just like everyone else. When we see 65 percent and 80 percent of
headlines touting negativity though, we might want to at least (personally)
take notice that there's a type of 'influence' taking place.
If the news just reported news, like non-trivial whatever, would you be
interested? The flaw in the human condition is that we are drawn to
sensationalism- whether it is fear, or exuberance. The critical point of
understanding here as well, is that intimidation isn't always in the form of
negative headlines. Remember my previous discussion on the
dotcom.bomb?
Well, if you were trading prior to the turn of the century, you likely
remember terms like "new economy."
Mainstream media was all over 'new economy' mania touting rising
indexes and rocketing stocks, while Internet companies poured in the
advertising dollars… In January of 2000, sixteen dotcom companies forked
over (on average) $2.2 million each for 30-seconds of fame during
Superbowl XXXIV.19

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 Momentum begets momentum and nothing attracts a crowd, like a
crowd.
The problem is not only are our memories 'influenced' by whatever
negative, or positive hype is taking place in the moment, however, the
controlling emotion of the present is actually the catalyst helping to keep
the 'extreme anxiety' helix in motion… See, while in the thick of
exuberance, media is your best friend- all the inside scoops, stories and
tips… The pitchmen are all too happy to sell the greatest show on earth,
and dear friend…the trend will never end…
I don't care if it's Internet stocks or real estate; all trends do eventually
end.
Case in point, the last three letters of trend are:
end
When the bubble bursts, your old media pal (who was peddling tickets
to the show the whole way up), will immediately puke out the words: I
told you so.
And as quick as lickety-split, hawker-media will turn tides, being the
first to change face and tell the crowd, 'it was that dirty old rich fatso
Ringmaster.' The same media-mouth that was selling the tickets to the
circus-leader's show (only moments ago) will suddenly become 'a vigilante
of the people', asserting that it's imperative to take down the portly 'Richie
Rich' who did you wrong.
Someone, somewhere, always swindled the public; never the public or
media themselves. During the Internet era, it was highflying
entrepreneurs and venture capitalists; individuals had nothing to do with
the stocks they personally bought while riding high atop fluffy greed
clouds. In the current crisis, individuals were duped by predatory lenders,
with the larger criminals being credit-swap traders and investment
banks… All those people who bought too much house, just because 'they
could', had nothing to do with it.

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 Fact is, in the first moments of any bubble bursting, media will
immediately find the biggest scapegoats it possibly can (as quickly as
possible) immediately, diverting the public's memory from the ham-bread
hype Mr. Internet and television were handed out, all the way up. Then,
as the bubble draws out, media drowns the masses in negativity… After
all, idol minds are the devil's workshop and an idol mind- might begin to
remember that media had almost as much to do with the 'irrational
exuberance' of the bubble, as those they are currently hanging.
The conditioned maladaptive fear shtick works perfectly and just as the
crash rounds out of the bottom (and as quickly as Jekyll turns to Hyde);
those swell old media mouths and pundits are back on the bull
bandwagon again, circus exuberance in hand…
Old 'mega-mouth' might even mention he's learned his lesson and this
time, he can help you spot the poison apples.
The evidence shows -repeatedly- the deflection of blame for crashes
and bubbles, coupled with the constant cyclical maladaptive fear and
exuberance conditioning ensures no witnesses will remember the truth
from the scene of the crime…
What's more, the 'confusion' of blind devotion is an ongoing game that
must be continued daily- even when there is no apparent 'fear' and/or
'exuberance'.
And as you're about to see, even the 'accepted standard' of statistical
information regularly delivered to masses is part of the larger 'confusion'
puzzle keeping the investing masses from ever seeing the truth clearly.

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 The Accepted Standard of
Nothingness

It's blind devotion really- to take in information and never question

how the information is compiled… Reflecting back on the same Loftus'
quote from the opening of this chapter:
"Imagination can not only make people believe they have done simple things
that they have not done but can also lead people to believe that they have
experienced more complex events."20
When the EUR/USD plummets 300-PIPs intraday (after the release
of a consumer sentiment survey), retail traders who were caught going the
wrong way can easily fall precisely into the aforementioned trapping.
See, the 'event' was the loss. Was the cause- the consumer sentiment
report? Not really, the true cause was the breakdown in the way
information is collected and delivered. The subsequent event to the
sentiment report, which preceded the market move, was sell side traders
firing out orders because the market was moving away from their
benchmark. (I know this sounds a little foreign right now, but by the end
of Chapter Eleven, it will likely all come clear. The larger explanation of
the motivations behind institutional buying and selling demands a
thorough explanation, which we will get to in Part Two of Volatility
Illuminated.)

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 IMPORTANT NOTE:
Over the following pages, you are about to read how one commonly
coveted 'economic indicator' is slightly flawed… Let me rephrase
that… The report is not flawed in itself- actually, it is calculated
exactly as the 'industry standard' says it should be. However, the
'industry standard' in itself, is slightly misleading and probably needs
to be reconsidered. Again, I am not saying the report, or the
organization, is misleading the public, nor am I attempting to pick a
fight with the organization. I am merely speaking to the accepted
standard of gathering, analyzing and deploying information to the
public. It may be possible that 'polling data' within media (including
politics) might need a little reshaping to help deliver a more accurate
picture to the public.

Let's take a moment to talk about the scope and accuracy of the
fundamental data we receive in markets.
According to the Philadelphia Fed, the University of Michigan
Consumer Sentiment Survey is:21
Consumer confidence surveys measure individual households' level of
confidence in the economy's performance.

The monthly Survey of Consumers is a nationally representative survey based

on approximately 500 telephone interviews with adult men and women living
in households in the co-terminous United States (48 states plus the District of
Columbia). For each monthly sample, an independent cross-section sample of
households is drawn. The respondents chosen in this drawing are then re-
interviewed six months later.

A rotating panel design results, and the total sample for any one survey is
normally made up of 60 percent new respondents and 40 percent being
interviewed for the second time.

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 The Index of Consumer Sentiment (ICS) is derived from the following
five questions:*
1. We are interested in how people are getting along financially these
days. Would you say that you (and your family living there) are better off
or worse off financially than you were a year ago?
2. Now looking ahead--do you think that a year from now you (and
your family living there) will be better off financially or worse off, or just
about the same as now?
3. Now turning to business conditions in the country as a whole--do
you think that during the next 12 months we'll have good times
financially, or bad times, or what?
4. Looking ahead, which would you say is more likely--that in the
country as a whole we'll have continuous good times during the next five
years or so, or that we will have periods of widespread unemployment or
depression, or what?
5. About the big things people buy for their homes--such as furniture, a
refrigerator, stove, television, and things like that. Generally speaking, do
you think now is a good or bad time for people to buy major household
items?

Okay, so now, let's go back to the basics; reviewing lecture notes from
"Introduction to Statistics," by Steve Stanislav of North Carolina State University,
it appears there are really three types of sampling that apply to this type of data
collection:22
1. Simple Random Sample (SRS) of size 'n' consists of n individuals
from the population chosen in such a way that every set of n individuals
has an equal chance of being selected and each sample has an equal chance
of being selected.
Note: A SRS does not allow for favoritism by samples nor self-selection
by respondents

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 2. Stratified Random Sample - to select a stratified random sample, you
must first divide the population into groups of similar individuals called
strata/stratum. Then choose a separate SRS in each stratum and combine
to form the full sample.
3. Multistage Sample - same concept as a stratified random sample but
you divide each strata even further. So random samples eliminates bias,
but when a population consists of humans (as it does on earth), accurate
information requires more than 'a good sampling design.'
Hold your thoughts on the sampling space for just a moment, let's take
a look at the "surety" behind the numbers we are receiving from the media
in the first place…
There are two factors go into figuring out how "confident" one can be
that an entire population feels one way, or another: The confidence
interval and the confidence level.
Starting with the confidence interval, which according to Creative
Research Systems is, "the plus-or-minus figure usually reported in
newspaper or television opinion poll results." For example, if you use a
confidence interval of 4 and 47% percent of your sample picks a particular
answer, you can be "sure" that if you had asked the question of the entire
relevant population…between 43% (47-4) and 51% (47+4) would have
picked that answer."23
The second factor is the confidence level, which according to Creative
Research Systems "tells you how sure you can be. It is expressed as a percentage
and represents how often the true percentage of the population who would pick an
answer that lies within the confidence interval. The 95% confidence level means
you can be 95% certain; the 99% confidence level means you can be 99% certain.
Most researchers use the 95% confidence level."
So let's say that you live somewhere like, well let's just say: the United
States. In the North American country, there happens to be 305,705,463
people, as of the spring of 2009. If you wanted to report –with accuracy-
how confident a statistical study could/would be that 95% of the
population felt a particular way, you would first find the "confidence

Mark Whistler • Volatility Illuminated • Page 79 of 363

interval," which we just covered. However, let's drill into the number a
little, just to see if there's anything we might find interesting… If we input
the expected confidence level of 95%, with a population size of 500…
attempting to calculate how about half of the people felt on one matter, or
another, our confidence interval would be 4.38. What this means is that if
you survey 500 people in America on a subject, you can be 95% sure that
between 45.6% and 54.4% of the people would agree.
Funny thing though, if you wanted to be 95% sure that between 78%
and 82% of the people in America agreed with your answer, you would
need a sample size of 1,537 (the confidence interval would be 2, FYI.)

TO SEE VOLATILITY ILLUMINATED

YOU MUST BE WILLING TO SEE
INFORMATION CLEARLY

Okay so here's the deal… The commonly accepted methodology

behind the way major polling data is collected is drastically faulted-
though it's not the University of Michigan's fault. It's about 'media
protocol' delivering partial truth to the masses. Part of the issue is that of
the good old "media business as usual", which propagates misinformation to
the public.
Really, what I'm getting at, is that given the population's size, we can be
95% sure that about 50% of the people in America agree with the survey's
results.
I don't want to bash the University of Michigan here, because it's a
general rule of thumb that when sampling a population for statistical

Mark Whistler • Volatility Illuminated • Page 80 of 363

results presented to media; one needs to use the 50% benchmark to assume
a worst case scenario.
Then again, the media doesn't really tell you this little detail when most
surveys are released, do they? Honestly, I couldn't even find the
information on Reuter's site. What I'm really saying is that what we have
is a two part problem. To pad for error, researchers are forced to use
"worst case" confidence levels, which in turn means smaller sample sizes.
Making matters even more unnerving, when the results are published,
consumers are not informed of the data or confidence levels used behind
the information they are receiving.
Take the last sentence in the first paragraph on the December 2008
report, which read, "Although most consumers view the recent price declines as
due to the recessionary downturn in spending, even longer term inflation
expectations have decreased. While most consumers expect a rebound in prices
when the economy recovers, they now anticipate a somewhat lower overall
inflation rate to prevail in the future."
Here's the point, according to The Study of Economics: Principles,
Concepts & Applications, published by McGraw-Hill:24
"The most common cause of inflation is too much money chasing too
few goods. If everybody had 5 times as much money, but the amount of
goods and services produced remained the same, prices would naturally
rise by a factor of five. So the answer to avoiding inflation is simply to
avoid printing too much money. Easier said than done…
Government leaders like to spend a lot of money on military
equipment, roads, subsidies, building projects, etc., because this keeps
them popular with their constituents. But getting money to pay for these
things is often difficult. Raising taxes is as unpopular as government
spending is popular."
So my gripe with the information provided three paragraphs above
from the December University of Michigan Consumer Sentiment Report is
this: How can "most consumers" believe "a somewhat lower overall
inflation rate to prevail in the future," when it's economics 101 common

Mark Whistler • Volatility Illuminated • Page 81 of 363

sense that when the Government prints more money (think stimulus and
bailout), inflation becomes a deadly threat looming?
Who are these "most Americans" anyway?
Either "most American's aren't aware of the real situation at hand –
meaning the survey is a contrarian indicator – or we're not getting the real
story.
Listen to this…first, sure, yea right…it makes sense that many
American's wouldn't feel like 'too much money was chasing too few
goods', after all, almost none of the cash the Government is handing out is
showing up on the average American's doorstep. For the little guy –the
retail trader- the only real stimulus he's getting is a headache with the slow
economic grind down, while watching executives blow hordes of bailout
cash on leer jets.
Case in point, by June of 2009, weekly Federal Reserve Data indicated
core loans and leases from banks were down almost 8% over the previous
three months, and 1.6% over the year ago period.25 The facts clearly show
consumers have not been the benefactors of Government spending, even
though (in all) US Government recovery spending was nearing almost $3.8
trillion (Federal Reserve, Treasury, Federal Deposit Insurance Corporation,
Federal Housing Administration, Congress and Joint Fed, FDIC and
Treasury) into the early summer of 2009. Well you're darn right many
consumers aren't aware to be on the lookout for inflation, after all, they
hadn't/haven't –personally- seen a nickel of the Government's monetary
upchuck since the start of the crisis.26
There's something else happening here too; remember those confidence
level things? We're talking about basing opinions on whether a 'slight
majority' of the public feels conditions are getting better, or worse. But
what is 'slight majority' data anyway? Want to know? I'll tell ya…'slight
majority' data is just the type that's required to determine the outcome of
an election…like if you get 51% of the votes, you win. However,
economics do not work that way- if 54% of consumers vote the economy is
improving, a larger economic 'growth cycle' doesn't just 'win.'

Mark Whistler • Volatility Illuminated • Page 82 of 363

 And yet; similar methodology is used in polling for economic
sentiment, as Presidential elections. Uh… Okay…
At the end of the day, it is important to take all "survey related" reports
with a grain of salt. In addition, when we dig into the information
delivered by media, in many, many cases we find the information is often
'murky'… I'm not saying the media is fibbing, what I'm implying is the
information delivered does not truly and accurately lay out the entire
picture from an unbiased, or impartial standpoint.
What's more, mainstream media tends to have a heyday with
"consumer sentiment" reports, which is really a translation of a translation,
making big inferences about the total population, which in part, is just
another shoveling of nothingness into the individual's lap. What we're
talking about is light-speed information changing the total critical mass of
market moving disasters pending… Oh, wait, what I've just mentioned
doesn't come until Part Two of Volatility Illuminated. 
At the end of the day, what I'm really proposing here is that much of
the information often 'reported' to the public (regarding fundamentals)
isn't really fully explained and thus, it's no wonder the average investor
always seems to get the shaft every few years…

Unfortunately, we simply cannot depend on mass media to deliver

clear, helpful, reliable information for our investing pursuits…we MUST
(as individuals) take the time to truly dissect ALL of the information that
could have any impact on the positions we are taking within whatever
market we are trading… Sounds like a ton of work right?

Right, which is why 95% of all retail traders lose.

What I'm saying is 'man up' and dig into the details.

Overall, the larger point behind everything you have just read is… Not
only is much of the information we are receiving potentially faulted in
delivery, but because we are receiving potentially misguiding information

Mark Whistler • Volatility Illuminated • Page 83 of 363

from the start, our memories could be hindered in the future, when
attempting remember the past.

What we have is a massive problem with the clarity and delivery of

information overall, where the individual must take the time to not only
understand the information coming forward, but also reflecting upon how
major media is reacting to, and then delivering, as well.

Media has a major interest in every headline delivered... What I'm

talking about is: the more you staying glued to the tube, the more the tube keeps
advertising revenue glued to the network's wallet.

Thus, we have to not only keep a close guard on our emotions, as we

take in everyday information, but we must also understand that the
constant bombardment of positive or negative headlines is affecting our
memories. What's more, when the information of today- is repackaged
and redelivered in the future, as a historical recap of what was happening
today; if we did not take the time to accurately understand the events
unfolding now, we will not remember correctly in the future- and thus,
could fall victim to having our memories partially recreated in tomorrow-
land...

Referencing the famous line by Gordon Gekko, Michael Douglas'

character in the movie Wall Street, it's probably a good idea to second
guess almost all of the information surfacing from media, as with slightly
closer examination of the facts, we could find 'mega-fog-mouth' actually
just slapped some lipstick on a pig…

Now that we've covered why and how we must question almost all
information we receive daily, we will now talk about two technical
strategies that generally work well within in trading.

However, we will also attempt to understand why the technical

strategies can also fail at times, thus leading us into a greater
understanding of why volatility and probability and understanding

Mark Whistler • Volatility Illuminated • Page 84 of 363

institutional order flow are necessary to (at the very least) double check the
technical indicators most view as reliable…daily.

As one final side note, I don't want readers to think I'm insinuating we
have 'question everything', like as in we should walk around in a paranoid
state of distrust… Please do not mistake my point… What I'm really
saying is…common sense sure goes a long ways… That's all really… just
plain old-fashioned common sense.

Mark Whistler • Volatility Illuminated • Page 85 of 363

 CHAPTER FOUR
FIBONACCI & Pitchforks

Forex markets are tricky, there's no doubt about it. Wide spreads,
seemingly unexpected volatility and odd hours can all take a huge dent
out of traders' wallets. However, with a few simple strategies, both long
and short-term traders can potentially make a big difference in their
bottom lines. Here we're going to cover two simple trading strategies:
Fibonacci Retracements and trend analysis through pitchforks. What's
more, we will also overlay the two strategies, creating what we will call the
Forex Fibonacci Pitchfork Strategy. By utilizing Pitchforks and Fibonacci
Retracements in our trading, we may find ourselves suddenly empowered
with what is really… an almost laughably simple (but effective!) trading
tool.
Getting straight to the meat, Fibonacci Retracements are probability
points where a currency or stock are 'expected' to bounce back near, after a
large move, before continuing in the original direction.
Think of Retracements in terms of Newton's Third Law of Motion: "For
every action there is an equal and opposite reaction."
Within this understanding, trading carries some of the same principals.
However, I would like to add that after a large move, the opposite reaction
can quite often lose energy quickly, and thus, is why the 'reactive move'
after a larger previous ascent, or decent, can be less than the large move
itself. This is not to say that once a large upside pop, or landslide selloff

Mark Whistler • Volatility Illuminated • Page 86 of 363

takes place, the currency will not completely retrace the original move,
however, without a fundamental event prompting a larger reversal,
energy is often lost in the bounce.
Employing Fibonacci Retracements, we can find some guidance as to
where the reactive-moves could lose steam and continue in the original
direction.
Ironically, Leonardo Fibonacci lived in the 13th century, while Newton
worked in the 17th century. Perhaps Fibonacci unknowingly uncovered
the truths behind the laws of motion…centuries before Newton's name
became a name brand of motion postulation…

Fibonacci in Nature

If you're not familiar with Fibonacci ratios /numbers, the concepts of

such are directly consequential from nature, and are found in virtually all
organic sciences today. Briefly, a Fibonacci string results from adding
previous numbers together, to find the next. For example 1+1=2, 2+1=3,
3+2=5, 5+3=8 and so on… The Fibonacci string would look like:
0,1,1,2,3,5,8,13,21,34,55,89,144,233...
In nature, the spiral of seeds in a sunflower are exactly ordered in
Fibonacci sequence, as with many occurrences in organic life.
Fibonacci ratios are thus, derived from organic numerical sequences.
For example, if you take any eighth number in the sequence and divide it
by the number following it in the sequence (dividing the eight by the
ninth); the answer will ALWAYS be 61.8. In the above string, if we divide
the eighth number (21) by the ninth (34), we get 61.76, or 61.8 rounded up.
It just is.

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 Market quants hold that Fibonacci is not only true in organic matter,
but also carry substance within day-to-day trading as well. Thus,
Fibonacci ratios often lay out of a map for Retracement levels, after a
significant move.
However, because bounces must put in lower lows, or higher highs for
a larger trend to remain intact, we intuitively also understand Fibonacci
ratios only hold true, so long as a trend is indeed- in effect.
Thus, perhaps Newton's Law of Motion that says, "For every action
there is an equal and opposite reaction" fails to take into account the loss of
energy in reaction, when markets are trending.
There could be another factor involved though, which may be
overcome by combining Fibonacci with the founder of quantum physics
Max Karl Ernst Ludwig Planck's formula E=hv, where "energy is and
absorbed in quantities divisible by discrete 'energy elements'".27
For the physicists out there, don't worry, there's plenty of goodies for
you in following pages. Now, let's look into how one can -very simply-
use Fibonacci Retracements in Forex trading, without any complicated
math.

The Fibonacci Prophecy

All of the magical math in the world will never make Fibonacci
Retracements true 100% of the time. Period. Thus, a little common sense
goes a long way when using any type of mathematical or technical
indicator to trade with. If the market is showing something different from
the indicator, enough people believe in something different from what the

Mark Whistler • Volatility Illuminated • Page 88 of 363

indicator is presenting, and thus, the indicator is wrong. Fibonacci
Retracements are relevant only so long as enough people are watching and
acting on the same information that the "collective whole" makes the
occurrence a self-fulfilling prophecy. In other words, even if you've
opened a trade based on Fibonacci Retracement expectations, be prepared
to close the position, should common sense warrant such. In addition, as
I've just mentioned that Fibonacci Ratios/Retracements require some
application of a self fulfilling prophecy, too many people acting on the
same information at the same time, can actually cause excessive volatility,
as noted in Chapter Two.
Fibonacci Retracements work on both short and long-term periods, for
all types of traders. For this chapter though, we will only look at Fibonacci
Retracements for short-term trading on 4-hour charts.
First, before we even consider using Fibonacci Retracements, we need
to be able to spot when a move has occurred that would warrant using
Fibonacci Retracements in the first place. This can be as simple as looking
at a chart, and visually identifying when a large move has transpired,
and/or capitulated.
What I mean by this is, when looking at a chart, if you're expecting to
see empirical proof that a move has stalled, you will never be able to do so.
You will see some signs, like CCI turning upward from -100 (and vice
versa downward from +100) or Stochastics bottoming out, or a candlestick
pattern like a hammer bottom, but you will never know absolutely 100
percent for sure. If there were some way to know all the time, everyone in
the world would be rich. One way to have a slight bit of assurance
though, is to read volatility compression through short-term volatility
bands compressing back underneath long-term volatility. The
aforementioned is likely foreign sounding to most- as it should be. I will
explain concepts of volatility bands -in detail- in the second half of the
book. For now, simply log the statement in your mind, for future
reference.
Traders can learn to intuitively 'feel' when a move has capitulated
though. However, only countless hours of pouring over charts will give

Mark Whistler • Volatility Illuminated • Page 89 of 363

you 'the feel'. Once you are able to infer a move is over though, you can
begin to apply Fibonacci Retracements for trend re-entries, or profit targets
points, if you are trying to trade the rebound.
I would like to mention that attempting to trade a 'bounce' is risky
business and is not really the subject matter of this book. However, we
will look at a possible reversal trade with Fibonacci Retracements, just to
cover all our bases. Really though, when we use Fibonacci Retracements,
we should use the technical tool to time our 'trend re-entry' points in an
attempt to take positions with the trend, not against.
Looking into when to apply Fibonacci, the below chart shows a
significant downward in the USD/CHF (U.S. Dollar / Swiss Franc). What
we see is a 'significant move', which is precisely what we're attempting to
find when applying Fibonacci Retracements.

Mark Whistler • Volatility Illuminated • Page 90 of 363

 Figure 4.1

Based on Figure 4.1, many traders were likely looking for additional
downside to come, as the USD/CHF previously took out support in the
1.0950 area. A major breach of support or resistance is often a key signal
that more trending is to come.
Some turned the dollar long, others waited for key Retracement levels
to be hit, before taking positions…
The bottom line though- is we must be able to identify some sort of
'significant move', before we can apply Fibonacci Ratios at all.
With the aforementioned in mind, we will now take a look at how we
can use Fibonacci Retracements to trade a possible 'bounce' or reversal,
once a larger move has taken place.

Mark Whistler • Volatility Illuminated • Page 91 of 363

 In Figure 4.2, you will see a large downward move, where the
Australian dollar declined significantly against the New Zealand dollar.

Figure 4.2

Several indicators (not shown) were prompting the bulk of the damage
was done and the pair would likely experience a 'bounce', otherwise
known as a short-term reversal.

Regardless, the Retracements can also serve as profit targets for reversal
trades.

Perceptive traders could have taken long positions in the Australian

dollar –off the bottom of the range- using the low of the range as a stop.
By means of Fibonacci Retracement levels in such a case, traders would
use the key indicator as possible profit targeting points. If one had taken a

Mark Whistler • Volatility Illuminated • Page 92 of 363

position in the AUD/NZD off lows, when the pair tagged the 38.2%
Fibonacci Retracement level, it would have been a good idea to either take
all profit, or place a stop slightly below the 38.3% Retracement. The reason
for placing a stop just below the 38.2% Retracement is this:
If the bounce is real and a reversal is truly in effect, chances are the upside
momentum will persist, however, as Fibonacci Retracements are significant trend
re-entry points, and given that positions into retracements are moving again the
larger trend at hand, locking in bounce profits is always a good idea.
Again, Fibonacci Retracements are also key levels where 'with the
trend' traders will begin wading back into a pair… What I mean by this is
if a Forex pair, or stock, just witnessed a massive downside slide, many
traders are likely trying to find low-risk short entry points to capitalize on
another move downward, should more selling surface. Thus, the 'bounce'
trader will experience significant volatility at key Retracement levels, as
many 'with the trend' traders attempt to take opposite positions. Thus,
bounce trader are faced with several questions as their trades move into
retracement levels.
1. Take profit?
2. Fight the volatility? (If he or she has considerable reason to believe
more bounce is to come.)
In figure 4.2 and as bounce traders likely expected, the AUD/NZD did
hit the 38.2% Retracement within 12 hours of the low. However, the
AUD/NZD sold off again (twice actually), before making a run at the 50%
Retracement. (Again, though we won't cover the subjects until further on in the
book, sustained rebounding, or prior trending continuation is where
volatility/probability will really help traders.)
The bottom line in the AUD/NZD example is jittery traders were likely
shaken out when excess volatility surfaced around the key Fibonacci
Retracements.
It's important to mention that those with steadfast stops -just below the
low of the original move- would have not lost their positions. The

Mark Whistler • Volatility Illuminated • Page 93 of 363

question is though, can you risk the loss, or for that matter, giving up
profit considering you could have exited at the 38.2% level?

Here's one way to solve the problem(s). When trading a reversal set your
stop as soon as you make the trade (if you have a non-US account able to enter
stops and limits)… Then, set a sell order for one quarter of your position at the
38.2% Fibonacci Retracement, so if the trade fails, you will have a small buffer
when your stop is hit on the downside. (You will need to adjust the position size
in your stop, if the 38.2% Retracement is hit; accounting for the 25% of your
position, you just sold for a profit.)

Figure 4.2 (Shown again)

At the same time you made the initial trade, set a sell order for 50% of the
total initial position at the 50% Retracement. In the case of AUD/NZD, when the
pair first hit the 50% Retracement, you would have taken even more off the
table…and would need to adjust your stop order accordingly, as you will now only

Mark Whistler • Volatility Illuminated • Page 94 of 363

have 25% of the original position. Then, with the remaining 25%, you can set
another limit order to sell at the 61.8% Retracement, or let it ride. FYI, from my
experience trading Forex, the 61.8% Retracement level seems to hold the most
weight… If a pair does not reverse the bounce at the 31.8% and 50% levels, and
you see a 4-hour bar close near the 61.8% Retracements, there's a good chance
the pair will retrace the whole move.

Regardless, the Retracements serve as profit targets for reversal trades, or re-
entries for those who believe larger trending will persist.

You must decide for yourself whether you will trade for larger moves,
or quickly scalp profits on smaller, sudden volatility pops. It is my
experience that traders who take small profit after small profit and cannot
hold for larger wins, eventually get killed when they take a bigger loss.
Truly great traders know one of the keys to success is:
…little loss, little loss, little loss, big win…
…not vice versa.
Thus, attempting to trade bounces is generally a losing proposition
overall. Really, we should attempt to trade with the trend, using Fibonacci
Retracements as a tool to help time our entries.
For traders who think the pair will continue the original move, you can place
your short orders near key Fibonacci Retracement points, where you hope to
reenter in the direction of the big-move trend.
One way to do so is to place an order for 25% of your total predetermined size
at the 38.2% mark, 50% at the 50% mark and 25% at the 61.8% mark… This way,
you've allowed yourself 'wiggle room' if the 38.2% and 50% Retracements do not
hold. It's important to note though, that if the 61.8% Retracement is breached –
significantly, the pair will likely retrace the entire move, an event that happens
quite often in Forex trading, especially on short-term charts.
The best rule of thumb in this case is as simple as the old market saying:
When in doubt, get out.

Mark Whistler • Volatility Illuminated • Page 95 of 363

 In addition, as we're about to cover, it is a good idea in today's market to
actually place orders above Fibonacci Retracements for short positions and below
for long positions. By doing so, we attempt to starve off volatility from the HIIV
Effect mentioned in Chapter Two. I'll explain this in greater detail in the following
pages.

Fibonacci Retracement
Volatility

As we discussed in Chapter Two, indicators are indeed failing retail

traders in the current market.
Fibonacci Retracements are no less affected… The problem is there are
simply too many traders using the same signals, all acting at the same
time. Think about it for a moment… If the entire retail community is
watching the 38.2% Retracement as a short entry point in a downward
move, what's the likely result? The result is many, many traders will also
likely act on that same information at the same time, taking short positions
in the same places at –or near- the Retracement I've just mentioned. But
what happens if a large institutional order pushes the stock, or currency
pair slightly above the Retracement? The result would likely be a massive
wave of electronic stop orders tripping globally, as retail traders stop out
on excessive volatility.
The problem is that as momentum begets momentum, stops also beget
stops, meaning once a wave of stops are hit, the actions could cause just
enough upside volatility to trip even more stops- slightly higher.
Mark Whistler • Volatility Illuminated • Page 96 of 363
 What all of the aforementioned means is that it no longer pays to take
a position 'just before' a key technical, or Retracement level.
Too many people are likely doing exactly what I have just mentioned
(shorting before the key Retracement) and as soon as a slight amount of
volatility occurs, those same traders will be stopped out, thus causing an
additional wave of volatility. Then, just a few moments after the entire
retail crowd is wiped out, the currency pair will reverse and travel in the
initial direction…leaving 'at home' traders scratching their heads
attempting to figure out how it is they always seem to get stopped out
precisely at highs, or lows… Just before the pair moves in the direction
they had originally anticipated.
To combat this issue, traders should take positions a little 'out of the
money' from key technical levels. What I mean is if you are going to time a
short entry with the Fibonacci 38.2% Retracement, it might be a better idea
to wait until upside volatility hits 40 or 42%, thus using the 'HIIV Effect'
(Chapter Two) to your advantage. For the 50% Retracement, we may want
to use 55 to 58% and for the 61.8% Retracement, perhaps 66 to 68%. The
bottom line is because of the HIIV Effect, we simply need to build in a little
'volatility premium' into our perceived entries and exits.
The following chart shows just what I mean… If you were attempting
to take a position short in the EUR/USD using the 50% Retracement as
your entry, it would have paid to wait until the pair was slightly above the
Retracement, before taking the position. The EUR/USD 'popped' just
above the 50% Retracement, before falling through the floor. Those who
took positions before (just under) the 50% Retracement were likely
stopped out on the quick pop above and were likely shaking their heads at
'excessive volatility'.
However, the volatility savvy trader simply used the event to achieve
better fill short.
Figure 4.3

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 As Simple as a Pitchfork

What I'm about to show you is an incredibly simple technical analysis

tool; however, it is one that not many traders know about, despite the
apparent effectiveness. By implementing pitchforks, traders can quickly
identify short and long-term trends, in an effort to find incredible trades,
both with and against the trend.
Simply put, using this simple tool, "the trend" could become your best
friend, as you will know when to trade with, and/or against the larger
trading paradigm at work.

Mark Whistler • Volatility Illuminated • Page 98 of 363

 Pitchforks will also help show traders how to analyze the larger trend,
by identifying the 'median line' of the relevant trend in any given range.
Many novice traders fail to recognize larger trends within Forex, which
can often lead to unanticipated volatility.
With this in mind, we'll start with a explanation of pitchforks, and then
use a 'macro to micro' approach to find our trades.
As you will see, knowing the larger trend, before we look into shorter-
term trades can not only help us find more optimum entries, but can also
help us keep cool when volatility turns on.
By definition an "Andrew's
Pitchfork" is a series of three
points in a trend that dissect a
sharp ascending move, or
downward trough.
The line moving through the
middle of the trend forms the
middle prong of the pitchfork, and
is known as the 'median line.'
Then, upper and lower parallel
lines are drawn to project
ascending/descending support
and resistance and targets within
the perceived trend.
Figure 4.4
However, for the purposes of Forex, I have found through trial and
error, that the textbook definition does not work well. Thus, with one
slight tweak, pitchforks become immensely more reliable for long and
short term trading.
The below 4-hour chart of the GBP/JPY chart demonstrates why
connecting three points does not always work well…

Mark Whistler • Volatility Illuminated • Page 99 of 363

 Figure 4.5

As you can see, by simply connecting three 'lows' in the range leading
up to the trough, we would have an incorrect pitchfork, as the lower line
would not accurately represent the ascending channel.

The reason for the breakdown is simply because we must have equal
distance between the median line and the upper and lower pitchforks, the
inaccuracy of the median line itself- promotes a breakdown in the lower
ascending support line.
We must understand that there is a bit of an 'art' to drawing pitchforks
and at times, we will need to 'cut' the lows of an ascending trend or the
highs of a descending trend, to create an accurate median line.
To draw pitchforks correctly, instead of trying to draw a trend line from
three consecutive points to dissect the trough, we will simply find only
one point to start our middle trendline with. The point we will use can
be the lowest point (or highest, in the reverse case where there is a sharp

Mark Whistler • Volatility Illuminated • Page 100 of 363

rally, instead of a trough) prior to the opening of the trough. (It's much
simpler than it sounds.) Or, we can use the low of the move (which I
prefer) and then cut into the some of the lows, or highs of the move, thus
forming a more accurate representation of the true trend median.
Figure 4.6 shows what I mean… As you can see in the case of the
GBP/JPY, I used the low of the range as my starting point for the median
line; however, I did not connect the lows of the range… Instead, I 'cut'
slightly into the lows and dissected the trough at the precise mid-point. By
doing so, I have drawn a more accurate pitchfork, as noted in the currency
pair running up the lower pitchfork, without a significant gap in-between.
The instance of slightly cutting highs and lows is truly the 'art' portion
of identifying median lines (and pitchforks) something that you will need
to learn by trial
and error.
However, once
you have
mastered the
ability to
correctly identify
the –at times-
'mysterious
median', you will
find much greater
success in using
this simple, yet
effective, tool.

Figure 4.6

Mark Whistler • Volatility Illuminated • Page 101 of 363

 When we are able to correctly identify pitchforks, we will suddenly
find ourselves empowered with two possible trading strategies:
1. In ascending trends, buy pullbacks on either the lower, or the middle
prong, if a distinctly identifiable trend is in place. By buying
pullbacks into the middle, or lower prong in an ascending move, we
are really taking on the age-old market advice of 'the trend is your
friend.' In descending trends, sell the rallies up into the middle or
upper prongs, and you will be short with the trend.
We want to put our stops on the opposite side of whichever pitchfork
we have taken a position on, while also remembering that at times,
there will be a slight bit of volatility breach as well. Like technical
indicators are failing and like Fibonacci Retracements are seeing a
slight bit of 'excessive volatility' opposite major Retracement levels, as
pitchforks become more and more 'mainstream', we will begin to see
the same volatility effect taking place. With such in mind, we may
want to take our positions just slightly on the underside of a pitchfork
in an ascending move, and vice versa on a descending move- just to
build a little 'volatility premium' into our trade.
2. If in an ascending trend, the currency pair breaks the lower pitchfork –
more than what we would normally assume is not just a 'volatility
pop', turn the trade and go short.
Quite often, savvy traders will be piling in as well, and you can ride
the wave! If in a descending trend, the pair breaks through the upper
pitchfork, a reversal may be occurring and Forex traders can go long.

Mark Whistler • Volatility Illuminated • Page 102 of 363

 To isolate entry and exit points for daytraders, draw pitchforks on 4-
hour, 1-hour, 15-minute and 5-minute charts to isolate exact points for
scalp trades.
The idea behind walking down through the chart timeframes (even if
you're a scalper) is simply to have a greater idea of the larger 'terrain' at
hand.
There's an old cliché that goes something like, 'It's tough to see the forest
when you're in the trees.'
When we only look at 1, 5 and 15-minute charts we have chosen to
remain in the trees. However, even if we're doing nothing but scalping, by
at least paying attention to the 4-hour chart, we have a better idea what the
larger forest looks like (from afar), something that may help us keep our
bearings straight when we're in the thick of a trade.
Really, we're talking about a macro-to-micro approach…

Macro to Micro Pitchforks

Now that we've covered how pitchforks work and the right way to
draw technical tool, let's take a macro to micro approach to finding trades.
As you can see in the following monthly chart of the USD/JPY, the dollar
appears to have been losing steam since 2001. While the greenback was
not experiencing an all out descent, the chart shows the range as more of a
'slowly lowering' occurrence of consolidation. Looking for some sense of

Mark Whistler • Volatility Illuminated • Page 103 of 363

support for the larger multi-year range, we see such in the 100.11 area, just
above the massive 100 whole number. Moreover, when we look at the
larger trend, we see the descending middle pitchfork is very close to long-
term horizontal support on the far right side of the chart. Amazing! From
this chart we know the long-term trend is down and there could still be
more to come… We also know the pair is headed towards 10-year support
for the third time.

Figure 4.7

Next (and please forgive me, as I'm sure Figure 4.8 may seem slightly
confusing at first glance) we have the weekly chart. I have actually drawn
three pitchforks on this chart, one longer-term ascending trend pitchfork,
one medium term descending trend pitchfork and one short-term 'steep'
downward trend pitchfork.

Mark Whistler • Volatility Illuminated • Page 104 of 363

 Figure 4.8

Why so many pitchforks you ask?

The point of drawing multiple pitchforks in the first place…is to
uncover ALL possibilities, not just the 'one' that appeases what we want to
see.
By the way, I really believe the reason why many traders never win- is
because even when they are given the tools to trade, they make the tools,
or technical signals 'fit their preconceived opinion' of the direction they've
already decided (sometimes subconsciously and for no reason really) the
currency, or stock should move.

Mark Whistler • Volatility Illuminated • Page 105 of 363

 Thus, to uncover some sense of truth, we have to examine all options,
not just the one, or two that seem to fit the opinion we've already decided
fits…

Daily Chart in Action

As the below chart shows, the USD/JPY tagged the lower pitchfork of
the medium-term trend, while also hitting the middle pitchfork of the
short-term trend, it's likely a bounce (if even short-term) could ensue. We
also know the currency pair possibly put in the bottom pitchfork for a new
slow-ascending trend as well…
What we have to remember here is that until the upper pitchfork of the
steep descending short-term trend and the middle pitchfork of the
medium-term trend- are breached, the trend is still down.
Again, we see confirmation of the downward relevant trend in the daily
chart. As you will notice, should the pair continue to bounce; the
USD/JPY will encounter resistance in the (roughly) 111.50 to 113.00 area.
See, the whole point of pitchforks is simply to visually identify major
trend reversal points and/or trend re-entry points, ahead of the game…
In the present case of the USD/JPY, if the pair is to move above 113.00,
we could assume the recent low (which created the lower pitchfork of the
longer-term ascending trend) –is real- and a larger reversal is indeed, in
effect.

Mark Whistler • Volatility Illuminated • Page 106 of 363

Figure 4.9
However, until
descending
resistance of the
short and medium
term trends are
breached, risk
prevails for the
trader attempting
to take a long
position. This isn't
to say savvy traders
can't pick off long
moves, however,
we have to
remember the main
trend is still down.

This is knowing the 'macro' trend, or reversal points to help in our

intraday trading.
As we continue to examine the USD/JPY daily chart, we see the pair
recently rode down the topside of the upper prong… Again, it is
important to keep in mind that the pair is trading just above the middle
pitchfork of the short-term trend on the daily chart, with the medium-term
trend still showing downside to come.

Mark Whistler • Volatility Illuminated • Page 107 of 363

 4-Hour Chart

The 4-hour chart begins to shed more light on the current ascending
bounce, giving us some idea of what to expect in the near-term. As you
can see, I've drawn a 'assumptive pitchfork', thinking ascending support of
the recent uptrend could actually be the median line for a possible uptrend
to come, should the bounce continue. I've also drawn in two levels of
support, one at relative support of the recent trough and one at highs of
the 'relative range', while the pair was making new lows. What I'm doing
here is attempting to find high probability entry points, should the bounce
continue.
What's also important to note, is that I am also marking a final 'give-
point' denoted as Support 2 (sometimes known as a critical 'pivot point')
where bulls will likely toss in the towel and another re-test of lows is in the
cards.
Traders may have wanted to wait for a slight bit more 'guidance' to see
if the present ascending trend would hold… What you can't see here is
how volatility and probability could help determine if more ascending
action is to come, or of lateral trading will ensue.

Mark Whistler • Volatility Illuminated • Page 108 of 363

 Figure 4.10

We will cover volatility and probability in Part Two of Volatility

Illuminated.
In the next 4-hour chart (Figure 4.11), we can see the USD/JPY held the
lower 'socket' of the perceived Andrew's Pitchfork, which it rode all the
way into the 111.50 area, before signaling more downside to come…

Mark Whistler • Volatility Illuminated • Page 109 of 363

 Figure 4.11

The failure in the 111.50 area was then marked with lateral trading
action, which would have prompted us to move the handle of our
pitchfork inside the ascending relevant trend to more accurately reflect the
true range 'median line.' Then, after the USD/JPY made a significant
breach of the lower pitchfork after testing the 114 area, we would have
watched support in the 112.50 to 113.00 area of a larger breach of trend…

Mark Whistler • Volatility Illuminated • Page 110 of 363

 Figure 4.12

For courageous swing traders, the final stop should have been the
highest high of the relevant pitchfork trend. However, for newer traders
(who should not be taking on significant risk), zeroing in on a trade, if the
pair breaks the prong the trader bought or sold from…on whatever
timeframe chart prompted the entry…close the trade.
Chances are there's a reversal looming, or volatility is about to shake
out a ton of traders.
Regardless, you don't want to be one of the poor-souls who hangs on,
only to be forced to exit at the last moment…taking a whopper of a loss.

Mark Whistler • Volatility Illuminated • Page 111 of 363

 Remember: Missed money is always better
than lost money!

Overall, the monthly chart showed us the long-term trend was down…
and chances are the dollar could take another dive. However, the weekly
and daily charts were alluding to a possible short-term pop looming,
which confirmed on the 4-hour chart. If some of the information above
seems a little jumbled…it is. See, pitchforks are continually changing
dynamic tools where we must constantly look for changing ranges and
medians… What I have just mentioned is much of the reason volatility
and probability help illuminate some of the choppy action that surfaces in
trading daily.

We will now apply Fibonacci to pitchforks, to create a more useful

tool… However, all 'standard technicals' eventually break down and thus,
without the application of volatility/probability; even Fibonacci Pitchforks
tend to mislead traders from time to time. Again, please note that we will
cover volatility and probability in Part Two of the book.

Mark Whistler • Volatility Illuminated • Page 112 of 363

 Note
When trading longer-term reversals, it is always best to wait for
significant confirmation of a trend change, before jumping the
gun. Those who try to trade 'the big picture' without
confirmation can fall victim to presumptuous/impulse-trading and
consequently, can incur large losses.

Mark Whistler • Volatility Illuminated • Page 113 of 363

 CHAPTER FIVE
VOLATILITY ADJUSTED Forex
Fibonacci Pitchfork
Strategy

Over the following pages, we will see how Fibonacci Retracements and
Pitchforks come together, helping locate high-probability trending re-
entries and/or larger reversals. What is truly amazing about overlaying
pitchforks on Fibonacci Retracements is the simple fact that by doing so,
we are attempting to 'trade with the trend', while also identifying entries
that give us clear stop-loss points to maximize risk management within
our trading.
The main principal behind the Fibonacci Pitchfork Strategy is to overlay
at least two pitchforks on top of Fibonacci Retracements, and then look for
larger trend entries near the 50% and 61.8% Retracements.
By doing so we:
1. Maximize major trend re-entry probability.
2. Identify if and when the larger trend is breaking down and thus,
close our losing trade and turn the position in the new direction,
attempting to capitalize on the larger potential reversal at hand.

Mark Whistler • Volatility Illuminated • Page 114 of 363

 Here's how it works. In the below daily chart of the EUR/USD, you
will see a Fibonacci Retracements overlaid on the most recent rally, in an
effort to find reentry points for the long-term upward move. We know the
relevant trend is up; however, given strength of the U.S. Dollar through
the financial crisis, we cannot completely rule out more upside to come…
Regardless, given the oversaturation of money supply from October 2008
through the spring of 2009, there could be more strength to come in the
EUR/USD while markets attempt to decipher credit quality of U.S.
Treasuries and overall 'holding power' of the greenback. With the
aforementioned in mind (and please note that I am always considering the
larger 'fundamental picture' even though we're looking at technicals) there
could be a major point of trend continuation (upside re-entry) looming.
Here's the thing though, we don't have to have an opinion, we can
trade the upward, or downward moves profitably using the Fibonacci
Pitchfork Strategy with predetermined stops, we just need to be patient
about our entries. What I'm saying is that instead of having an opinion
and just 'jumping in' we can wait for high-probability entry points. The
whole point of patiently waiting for these points to surface, is we are
taking positions at major points that even if we are wrong, we can keep
stops super tight, to quickly close the position and then turn it in the
correct direction…
The below chart (Figure 5.1) is going to look a little confusing at first,
but stick with me for a moment, and you will see the strategy is actually
quite simple.
The foremost trend we have identified is the present ascending
pitchfork, with the handle starting in the 1.2525 area… We know this is
the relevant trend, as the recent high strikes the middle pitchfork almost
exactly.
What's more, we have drawn a second descending pitchfork (short-
term) from the high, dissecting what appears to be a small rally from

Mark Whistler • Volatility Illuminated • Page 115 of 363

approximately 1.3805 to 1.4170. We have also drawn a Fibonacci
Retracement from 1.2889 to 1.4334. We are now attempting to identify
trend re-entry points for the longer-term ascending move, while also
looking for low-risk short entry points, should recent selling continue…
Also, please note that I have drawn to Schiff Parallel Lines… While I have
modified the definition slightly –to what I find works within Forex- Schiff
Parallel Lines are trendlines drawn parallel to middle, upper and lower
pitchforks, which are equal distance from the pitchfork as the previous
'blip' recorded. In theory, the stall into a pitchfork or extension slightly
beyond, foreshadows a second stall of volatility, or slight pop beyond the
pitchfork line in question. Andrew's pitchforks used to hold ground –on
their own- however, as many indicators today, we are now seeing 'pops' of
volatility beyond what used to hold, per the traditional definition of the
indicator. Simply put, too many people are using the same tool, which is
now causing additional volatility. To account for the slight bit of 'extra
volatility' in pitchforks, Schiff Parallel Lines seem to do the trick; at least
for the time being…
Moving on, also in the below chart, you will notice that I have marked
two possible long entry points, one where the short-term trend strikes the
38.2% Fibonacci Retracement, and a second where the short-term pitchfork
strikes ascending support of the relative range, while also tagging the
68.1% Retracement… Again if you remember my earlier discussion of
'excess volatility' in Fibonacci Retracements and in most technical
indicators, should the EUR/USD truly drop into the 68.1% Retracement, it
could extend slightly below the Retracement, while also slightly violating
ascending support on the downside, before starting a new rally… In
today's environment, we have to remember that all technical analysis has a
bit of 'art' to it in that excess volatility is creating 'blips' of trading action
beyond what used to seem like clear areas of entry and exit. For this
reason, volatility and probability, which you will read about in Part Two
are major assets in helping to find some clarity, when traditional technical
indicators fail.

Mark Whistler • Volatility Illuminated • Page 116 of 363

 Figure 5.1

For the time being; however, you can see what I am trying to do in
Figure 5.1 is line up trend re-entry signals with the longer-term pitchfork
and Fibonacci Retracements. What's more, should the lower pitchfork-line
(ascending support) fail, I am also attempting to see where the pair could
still begin to rally, as denoted in drawing the simple (dashed) ascending
support line of the relative trend.
It's also important to note that if the second Schiff Line (slightly
downside and outside of the larger ascending pitchfork) were to fail,
momentum short-traders could take positions, looking for a move into
ascending support, where they would then want to reconsider their
positions, potentially looking for an upside move to surface.

Mark Whistler • Volatility Illuminated • Page 117 of 363

 I would like to take a moment to drop in a few words of wisdom...
Many new traders never win big, because they don't understand that
losses will occur…
However, losses are the one thing (and I mean it…the only thing) you
can assuredly count on 100% in trading. Losses will happen, however,
keeping losses small, and handling situations where our trades are not
working is really one of the most constructive steps to becoming a
profitable trader. When loses surface, we must remember to keep our
emotions in check, while sticking to the original trading plan, knowing our
small losses will eventually be offset with large wins.
Moreover, new traders often do not understand that when technical
levels are breached –with relative significance- the trade must be closed.
Unfortunately, many newer traders can sometimes allow their emotions to
override the reality at hand... Here's another trading cliché that I firmly
believe in:

The first loss is always…the best loss.

In the above example, the potential damage from holding a long, if

major ascending support were to be breached, is simply just too risky. We
must remember that every single time we take a position; we have to
question 'what if?' What I mean by 'questioning' is for every trade we take,
we must have a 'turn it' plan in place.
The 'turn it' plan is precisely where we say, "Okay, I mapped out what I
thought was the correct technical picture, but clearly the market is saying
something different; I will turn the trade the other direction now, without
an emotional hold on my previous opinion."

Mark Whistler • Volatility Illuminated • Page 118 of 363

 Should ascending support fail, savvy traders would view the small loss
as an opportunity to turn the trade short, knowing that they were moving
'with the market' and not attempting to force something that just isn't
working.
Experienced traders know that we are never going to be right all of the
time, and it is truly 'how we handle positions that are not working', which
separates those who are profitable, from those who eventually blow up.
With all of the aforementioned in mind, if we now take a moment to
drill down into the 4-hour chart, we begin to see a little more 'guidance'
into the possibilities at hand. The 4-hour chart shows us that we are
currently 'mid-range' within the recent selloff and longer-term support.
Moreover, we can also see where a potential long-entry at the 39.2% Fib
Retracement sits- at the exterior Schiff Line, drawn just outside of the
larger ascending pitchfork. I have not noted the 50% Retracement as a
potential long-entry point, as other than lateral support from the relative
range, ascending support (noted on the daily chart) is sitting just below at
the 61.8% Retracement… The common sense 'sniff test' tells us that should
the pair continue downward in the near term, the 61.8% Retracement
(where ascending support sits), would likely be a more realistic target,
over the 50% Retracement.

Mark Whistler • Volatility Illuminated • Page 119 of 363

 Figure 5.2

Now, stepping down into the hourly chart, we see just how 'mid-range'
the EUR/USD is…
Again, the whole point of drawing pitchforks and Fibonacci
Retracements from macro picture down…is to identify high probability
entry points, within the larger picture. Some traders might be asking,
"What about right now, which direction will the EUR/USD travel?"

The answer is, "I don't know." Well, let me rephrase that… I have a
good idea, based on many technical indicators and the present

Mark Whistler • Volatility Illuminated • Page 120 of 363

fundamental outlook… However, for the example at hand, we want to
think:
"I don't know."
Why?
Foremost, even though I personally have a bias towards which
direction I believe the pair should travel, we are still mid-range,
consolidating after the recent move up. What's more, why would I want to
guess here, when I could simply wait for a higher probability entry? Thus,
looking at the hourly chart, I have a better idea where the 'higher
probability' entries are within the current trading action…and also the
longer-term Fibonacci Pitchfork strategy.

As Figure 5.2 shows:

1. I can attempt to take a long position on the lower Schiff Line, just
below the lower pitchfork of the ascending trend. At this level, if were
are not dropping rapidly, or any EUR/USD bearish news has surfaced,
I would likely attempt a long, placing my final stop just below the
38.2% Retracement, which we will call the support zone.
2. If the EUR/USD breached the support zone, I would likely then turn
the trade short, expecting an extended volatility selloff and a move
potentially down into the 61.8% Retracement.
3. If the pair held the 38.2% Retracement (knowing the key Retracement
would likely be breached slightly because of the HIIV Effect in today's
market), if no news surfaced changing my larger bias from long to
short, I may attempt another long trade, looking for the ascending
trend to stay intact. I would place my long stop just below my entry,
likely in the 44% Retracement area (not pictured), which (with a little
common sense) you can calculate by hand.
4. Should the pair fall all the way into the 61.8% Retracement, I might
attempt to pick up another long position; however, I would search
high and low for some sort of news providing transparency as to why

Mark Whistler • Volatility Illuminated • Page 121 of 363

 the 38.2% Retracement and ascending support of the lower pitchfork
did not hold. Fundamental news is always king and trading without
looking for changes in fundamental bias, and/or assuming technicals
will always 'tell the truth' is simply reckless.
5. Backing up to my original long entry (denoted as #1 in this string), if
the EUR/USD never actually fell into ascending support and instead
breached upper pitchfork descending resistance of the shorter-term
relevant range (likely witnessed by a move above 1.4080), I may take a
small 'breakout' long position too.
However, there
would likely be
news prompting
the trade… For a
trend to continue
(breaking out of
consolidation)
there is usually
some sort of
fundamental news
to accompany the
trading action.
Again, a little
common sense goes
a long way when
overlapping what
we see in technicals
to the news
unfolding within
markets.

Figure 5.3

Mark Whistler • Volatility Illuminated • Page 122 of 363

 Overall, as you can see, by overlaying pitchforks and Fibonacci
Retracements, we have created a strategy that:

1. Helps us identify the 'larger trend' and critical levels within

the relevant range.
2. Identified Fibonacci Retracements for the larger move at hand.
3. Located trade entry and stop loss points for 'with the trend'
trading, while also enabling us to take quick positions against,
should the situation warrant such.
4. Located larger 'reversal points' where we know to look for a
shift in fundamental mindset.
5. Created a clear plan for trading with the trend, but also
helping to understand when and where we should consider
turning the trade, should a reversal occur.
6. Produce a slight sense of peace, knowing that we are trading
with high-probability entry and stop loss points…

Again, I would like to mention that even with all of the technical
mapping in the world, excess volatility in today's market will cause
pitchforks, Fibonacci Retracements and even Quad CCI (which you're
about to read in Chapter Six) to breakdown. Thus, in Part Two, we will
dive into volatility and probability, providing even more insight into
today's market.
Towards the end of the book, we will then overlap Fibonacci Pitchforks
and Quad CCI with volatility and probability and as you will see, we will
unearth an amazing sense of clarity- most traders never find.
In the mean time, I would like to reiterate a few trading rules that we
must always remember…

Mark Whistler • Volatility Illuminated • Page 123 of 363

 Rules to follow

1. All of the magical math in the world will never make Fibonacci
Retracements true 100% of the time. Period.
2. A little common sense goes a long way when using any type of
mathematical or technical indicator to trade from.
3. If the market is showing something different than what the indicator
is presenting in the current market, the indicator is wrong.
Signals from indicators do fail.
4. Fibonacci Retracements are only good so long as enough people are
watching and acting on the same information (the collective whole)
to make the signal true, however, too many people acting on the
same information at the same time…causes excess volatility.
5. Again, even if you've opened a trade based on Fibonacci
Retracement expectations, be prepared to close the position, should
common sense warrant such.

Mark Whistler • Volatility Illuminated • Page 124 of 363

 A Few Final Notes

The trading example in Chapter Five utilized live charts… I did this for
two reasons:
1. Anyone can find a trade that works historically; however, real
traders know…what looks good historically…hardly ever works in
real time… Thus, the example above with the EUR/USD is/was
created in real time…
I do not even know what the outcome will be, as by the time history
cements itself, this book will be on the printing press…
2. To show readers that even though Fibonacci Pitchforks lack
volatility and probability edge, they do still work…that is, with a
little common sense…

Mark Whistler • Volatility Illuminated • Page 125 of 363

 CHAPTER SIX
QUAD CCI – THE TRADITIONAL
VOLATILITY PARADIGM

Within Forex, there's a term professional traders often throw around

when referencing the retail community… Retail traders are frequently
cited as doing nothing more than just 'chasing indicators'. Sadly, so many
retail traders fall victim to the mindset of believing trading is easy and/or
if they just uncover the 'secret technical code', they will never lose again.
With this mindset, it's no wonder these same traders unfortunately
constantly find themselves on the wrong side of the eight ball when
volatility kicks in.
However, there is another way to trade…
Throughout Chapter Six, traders will gain more insight into how and
why 'chasing indicators' is such a losing game, while also seeing how traders
can begin putting indicators back on their side…to overcome destructive
volatility that overwhelms most of the retail community daily.
However, it is important to remember that while the Quad CCI strategy
you're about to read about is something I personally use, I overlap the
strategy with volatility and probability, WVAV and WAVE • Price Mass to
gain greater insight into whether the signals produced are real- or are
really just 'those old charts fibbing' - yet again.

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 While the discussion on multiple CCI time periods is certainly not a
"one stop shop" to completely navigate the larger universe of trading stocks,
futures, commodities and Forex, using the indicator correctly can
definitely assist traders when markets are offering little guidance.
Take a look at the below hourly chart of the EUR/USD, which shows
the basic 'feel' of the Commodity Channel Index (CCI), at least, as most
traders use the indicator.
For the most part, the indicator is used to look for reversal (or trend re-
entry points) when the indicators falls from above +100 back under +100,
or up from underneath -100, above -100.
What you will hopefully notice right away is the first 'sell' signal (from
the left) and the third buy (also from the left, which I've marked with an
asterisk '*'), both provided false signals.
Figure 6.1

To understand why
the false signals could
be appearing, we need
to take a closer look at
the indicator overall…
According to one
major Website, (I'm
keeping their name
anonymous to not
drag them through the
dirt, though I have
notified them of the
error):
"An oscillator used
in technical analysis to
help determine when an
investment vehicle has
been overbought and

Mark Whistler • Volatility Illuminated • Page 127 of 363

oversold. The Commodity Channel Index, first developed by Donald Lambert,
quantifies the relationship between the asset's price, a moving average (MA) of the
asset's price, and normal deviations (D) from that average. It is computed with the
following formula…"

Here's where we begin to split hairs on a few important matters that I

believe you should be aware of…
The Website is correct that CCI was developed by Lambert (in 1980,
FYI), moreover, the definition is also correct in that the indicator is meant
to help determine overbought and oversold areas… However, CCI was
also developed to help find 'cyclical swings' of commodities and other
financial instruments. What's more, in the above definition, you will
notice the use of the terminology 'normal deviation.'
Just to make sure I'm not completely losing my mind, I checked about
twenty different Websites for definitions of CCI while writing this and
what I've found is that almost all mislead readers using the same, or
similar terminology…setting you up for failure.
The problem is likely because most of the information on trading-
related Websites is written by people who don't really trade in real
life…they don't even know the crap they are regurgitating is wrong.
I like to think of the situation similar to a rocket scientist explaining
how to smooth drywall mud almost perfectly…in one shot. Though the
task might seem easy overall, unless you've actually done it a few times,
there's no way you'd know the tricks of the trade, or the 'inner workings'
of how drywall mud sets on the wall and in the bucket, or even how
important the 'art' of trowelling is. (I learned the hard way renovating a
house many years ago… For the rest of my life, I will have an immense
amount of respect for drywallers. And let me tell you, I mean it too!)
Back on subject, in most definitions of CCI, we often hear terms like
normal deviation, or standard deviation as part of the equation. However,
what we must understand…is that CCI is calculated using mean deviation
(or mean absolute deviation MAD), not standard deviation.

Mark Whistler • Volatility Illuminated • Page 128 of 363

 Moreover, there is no such thing as 'normal deviation.' (Just to split
hairs, Roget's 21st Century Thesaurus, Third Edition lists 'normal
deviation' as a synonym for standard deviation; however, standard
deviation is not used calculating CCI, mean deviation is.)
Furthermore, what the heck is 'overbought' and 'oversold'? As you're
about to see, when CCI is trading above +100 and below -100, whatever
financial instrument the indicator is measuring may not be overbought, or
oversold at all…
I'm not kidding, the stuff most Websites feed traders is just plain
damaging…
To dig into the specifics, CCI is calculated using the 'mean deviation',
which is thought of as providing greater accuracy to non-normal (non-
Gaussian) data than the more commonly used standard deviation.
In the paper Revisiting a 90-year-old debate: the advantages of the mean
deviation by Stephen Gorard (presented at the British Educational Research
Association Annual Conference, University of Manchester in 2004), the
author asserts, "In those rare situations in which we obtain full response from a
random sample with no measurement error and wish to estimate, using the
dispersion in our sample, the dispersion in a perfect Gaussian population, then the
standard deviation has been shown to be a more stable indicator of its equivalent
in the population than the mean deviation has. Note that we can only calculate
this via simulation, since in real-life research we would not know the actual
population figure, else we would not be trying to estimate it via a sample."28
I understand why mean deviation is used in CCI (to attempt to
compensate for non-synthetic, non-perfect Gaussian price data); however,
after spending much of the past year mapping distributions in markets, I
would argue the shorter the timeframe measured, the more 'bell shaped'
data becomes.
What I'm saying is perhaps the formula for CCI is more accurate with a
greater set of data and that perhaps on shorter timeframes, the formula
needs to be changed to utilize standard deviation, over mean deviation.

Mark Whistler • Volatility Illuminated • Page 129 of 363

Don't worry though, we will change the formula on your charts, without
actually changing the formula at all! I'll explain in just a moment…
Below is the formula for CCI, please don't worry about digging too
deep into the math… You don't have to crunch the numbers, I would just
like for you to understand 'the philosophy' of what's happening, over the
mathematical fun-o-rama calculator super-time. The philosophy is what
matters…

CCI is calculated as:

CCI = (TPn - TPSMAn) / (MD * 0.015)

Where
TPn = Typical Price (High + Low + Close)/3
TPMA = SMAn = [(TP1 + TP2 + TP3…+TPn)/n]
Then…
CCI =
[[TP current period – TPMA current period]
Divided by
[((TP1 – TPMA1) + (TP2 – TPMA2) +…TPn + TPMAn))/n]]
All multiplied by 0.015

Okay, so where the heck is all of this going? The whole point of CCI is
really to measure the major 'Containment Zone' of a commodity, stock,
currency, or whatever… However, like everything else in the market
that's totally misleading and confusing, for whatever reason, the whole
point of CCI (as explained by 90% of the Websites out there) is as well.
Definitions of CCI state 'cyclical swings', major price movements and
reversals, deviation this and that…yada, yada, yada…
Here's what's really happening…

Mark Whistler • Volatility Illuminated • Page 130 of 363

 Imagine a teeter-totter that has values from -500 to +500, with zero
being the middle. I place a bowling ball on the teeter-totter and get it
rolling to the right side towards +500 and then tell you that you can't let
the ball roll off the end, but the rules are you can only touch the teeter-
totter and not the ball itself, what would you do?
Most likely, you would move to our left and push down on the
opposite side of the teeter-totter (the -500 side) to get the back rolling back
towards the middle.
Now, imagine that I had drawn -100 and +100 on either side of 0 (zero),
which right now, because you are pushing down on -500, the ball is rolling
back towards.
It would make sense that when the ball is rolling back from the +500
area and crosses over +100 towards the 0 (zero), the ball would likely
cross zero right?
Right?
Right…
However, please also imagine that I've drawn the numbers slightly
awkward to common sense in that the further from zero we get
(conversely, the closer to -500 and +500 the ball is), the more densely I've
drawn the numbers grouped together…
As a picture tells a thousand words, I've drawn the teeter-totter for you,
as a bit of a visual aid.
Please see Figure 6.1 on the following page and please excuse my art…
The main point is via Chebyshev's Theorem in statistics, we know that (on
average), about 75% all data will rest within two standard deviations of the
mean.
(In the case of a normal Gaussian curve, the probability is actually nearly 95%
of all data should sit within two standard deviations of the mean, thus, in using
mean deviation, Lambert was likely attempting to accommodate for non-perfect
bell-shaped data. Moreover, Lambert was likely also using Chebyshev's Theorem

Mark Whistler • Volatility Illuminated • Page 131 of 363

to justify the containment range of -100 and +100, implying 70% to 80% of all
data, which is why he used 0.015 as the multiplier…)

Just FYI Chebyshev's Theorem states:

"The proportion of any set of data lying with K standard deviation of the mean
is always at least 1-1/K2, where K is any positive number greater than 1.
For K=2 and K=3, we get the following results:
 At least 3/4 (or 75%) of all values lie within 2 standard deviations of the
mean."
 At least 8/9 (or 89%) of all values lie within 3 standard deviations of the
mean."29

Figure 6.2

Also, please note that in the real CCI, -500 and +500 are NOT the final
outlier values the indicator can move to…

Mark Whistler • Volatility Illuminated • Page 132 of 363

 Theoretically, CCI could travel infinitely up, or down… However, on a
common sense basis, people don't have to buy, but they do have to sell
sometime, and thus, prices (and CCI) will never travel infinitely in one
direction.
The basic point here is that when CCI crosses back under +100, or back
above -100, the theoretical underpinning is prices are moving back into a
more 'normal range' after just having witnessed a period of extreme
activity. What we're looking at is really just a measurement of 70% to 80%
of the expected statistical range for whatever time period we're gauging …
You might not be jumping up and down in your seat right now, but
wait a moment and I think you could be… Though the above sounds both
simple and boring, I like to think of anything that could make hordes of
money…as the exact opposite…
Amazingly, I would bet (without too much trouble) about 99% of all
retail Forex traders don't ever even know what they're looking at when
they use CCI to trade with… No wonder they have such a difficult time
making money with the indicator!
Honestly, by simply reading these pages, you're in the 1% elite who
actually know what they're looking at when they are trading with CCI…
So what we know is this… CCI is NOT indicating overbought or
oversold whenever the indicator moves above +100, or below -100.
Instead, CCI attempts to measure illuminate the 'Containment Zone',
which is intended to be 70% to 80% of the total range. Again, the
'Containment Zone' is denoted as the area in-between -100 and +100 in the
oscillator.
What I'm saying is this… In theory, when CCI is trading above +100,
the stock, currency, commodity, or whatever is thought to be trading
towards the top of the larger, typical range, and is in essence trading at, or
above +1.2 to +1.5 standard deviations (using the term 'standard deviations'
merely for the sake of example, knowing standard deviations are not used
in the actual calculation of the indicator.)

Mark Whistler • Volatility Illuminated • Page 133 of 363

 Conversely, when CCI is trading below -100, we generally assume the
financial instrument measured is trading below the larger, normal range
and is experiencing a period of volatility, denoted most often a sharp or
prolonged selloff.
Here's where CCI gets very interesting for those who understand what
they're looking at…
On the below chart (and I apologize for the likely confusion- it was
difficult to get everything in the image even remotely clearly) you will
notice what looks like fire, or hair, or something growing from the left
side…
What the mysterious wig-looking thing truly is showing…is an actual
representation of the 'distribution' of the price data on the chart. What
we've done is literally –visually mapped- the distribution of data, so that
you can see the distribution unfolding through trading action…
Here's what readers MUST make clear in their minds:
What we are really looking at when we look at any price data…is
data. The data is forming one HUGE distribution over all time, or a
series of subset distributions, on smaller timeframes.
Notice there is outlying data towards the upper and lower end of the
distributions; however, the bulk of the data rests in the middle; hence the
higher mountain-like 'peak thing' towards the center.
What you are seeing is –in essence- the Central Limit Theorem in
action. In statistics, the Central Limit Theorem says if we pluck a small
subset of data out of a larger skewed range (the totality of market data is
skewed, since time is skewwy skewness in itself), the subset should –for
the most part- retain a Gaussian bell curve like shape. What you are
seeing on the chart is exactly the case in point. For those who are
interested, in the final chapter of Volatility Illuminated, I will discuss
subset distributions further (which are really amazing and complex
animals in markets); reserving the 'mega-in-depth-conversation' for last. (In
reference to my own 'best for last' hype just deployed – and if you remember
Chapter One, I have a 50,000 mega-fog-mouth-lamp too! Just kidding. Anyway,

Mark Whistler • Volatility Illuminated • Page 134 of 363

the topic of distributions exposes Poisson distributions as a regular facet of
markets as well, thus, given the extent of the discussion required, I will hold off on
the exchange until the end of the book.)
Now, taking a look at Figure 6.3 (below) we are able to easily identify
that –indeed- trading action is -data- forming distributions. It is vital to
'show' the distributions, so that readers visually perceive why
understanding (at the very least) the conceptual framework behind
descriptive statistics is so important in day-to-day trading.
The bottom line is to be better traders -on the whole- we absolutely
must understand that the action unfolding on our charts is really nothing
more than: data.
Moreover, as you're also about to see, CCI is really an attempt a
measuring 'mean reversion' and or 'divergence' of the data. Divergence is
fancy-talk for 'trending', 'moving outside of the Containment Zone', or 'geez
Zeb, lookie that thang go.'
I personally think the below chart (Figure 6.3) has many, many
implications within trading and volatility; which I hope you will see too.

Mark Whistler • Volatility Illuminated • Page 135 of 363

 Figure 6.3

Please take a moment to notice the lower oscillator, where I have

attempted to draw lines from the actual CCI 'convergence points' at +100
and -100 (meaning the points at +100 and -100 where CCI breaks from
outside the containment area…back within) up to corresponding squiggly
lines in the actual chart itself.
Though my connecting lines (from CCI to the squiggly lines on the
chart) are not straight, a vertical line drawn on each would connect the
points. What you will notice is the CCI convergence points line up almost
precisely with the USD/JPY turning back into the middle range (upwards

Mark Whistler • Volatility Illuminated • Page 136 of 363

and downwards) of the channel looking thing that is overlapping the
actual price action on the chart.
What are the channel lines on the actual chart and how is it that they
(almost precisely!) identify the same mean-convergence type of action as
CCI?
Believe it or not [insert dramatic pause] I've drawn Bollinger Bands on
the USD/JPY chart as well.
However, what so many traders don't understand is that Bollinger
Bands are really a visual display of potential distribution wingspan- as
denoted through the visual mapping of standard deviations. (I will
discuss Bollinger Bands -in detail- in the second half of the book, just FYI.)
Sadly though, so many retail traders never even change the input variables
(standard deviations) within Bollinger Bands, while also failing to even
understand what the indicator is presenting in the first place.
Bollinger Bands come preloaded in every charting package (on the face
of the planet) at two standard deviations, which most traders never even
think to change…
However, in my humble opinion, to truly unlock the 'power' of
standard deviations as a measurement of volatility and probability within
trading, we must change the pre-loaded default variables. Again, I will
discuss standard deviations in great length in Part Two of Volatility
Illuminated.
Anyway, I have changed the values in the below bands to 1.25 standard
deviations…
By doing so, I'm measuring just over 70% of the total potential
'containment' of the distribution at hand.
Does what I've just mentioned sound a little like CCI?
It should, because we're basically looking at the same thing; however,
CCI is calculated with mean deviation (or [MAD] for Mean Absolute
Deviation), while Bollinger Bands are calculated using standard deviation.

Mark Whistler • Volatility Illuminated • Page 137 of 363

 Overall, yes I had to tweak the standard deviations setting in the
Bollinger Bands slightly, but really, the two are one in the same. (FYI, just
in case you might be wondering, the Bollinger Bands are measuring 14-
periods of data, just as CCI in the chart.)
Here's where the story gets even better… Have you ever had trouble
identifying trend? Or, have you taken a position that suddenly goes
against you and you look back and say, 'ohmygosh that was ridiculous, what
was I thinking?!'
If you've ever been in this place of brilliant trading euphoria, what I'm
about to present could help tons.
See, when looking at shorter-term periods, many traders often
mistakenly take a position against the longer-term trend, based on CCI
reversing down from the +100-oscillator level, or up from below the -100-
oscillator level and thus, find themselves in big trouble when the longer-
term trend resumes.
And really, I understand why they're making this mistake…after all, if
they had learned about CCI through just about any trading related
Website on the Internet, they would think above +100 is overbought and
below -100 is oversold. Really though, above +100 means "moving above the
first standard deviation", while -100 means "moving below the first standard
deviation", both of which mean, "subset distribution on the move – alert –
alert!"
So how do we defeat this potentially misleading and costly pitfall? We
identify trend.

Note: Please always remember to walk down through all your chart
timeframes (macro to micro) from monthly to weekly to daily to 4-hour to
hourly to 30-minute to 15-minute to 10-minute and so forth… Walking

Mark Whistler • Volatility Illuminated • Page 138 of 363

down through the charts is the best way to identify trend from the wide-
scope monthly all the way into the minutia of the minute.
Again, we're simply attempting to keep the forest in our mind's eye,
when we're in the trees.
Specifically to identify trend though, please look at the below 4-hour
chart of the EUR/USD… I have added in 1.25 14-period standard
deviations with 14-period CCI. What I think you will notice is that when
the EUR/USD is traveling near the mean, we're basically 'trendless.'
What's more, in those peculiar times when CCI is actually trading
below -100, it is precisely when the EUR/USD was staging the largest and
fiercest moves downward…
Conversely, just when the EUR/USD traded to the top of the
'Containment Zone', we failed.
But how many people would have known to associate the move
downward below -100 in CCI as 'big selloff to come'?

Mark Whistler • Volatility Illuminated • Page 139 of 363

 Figure 6.4

What's more, how many would have known to spot the 'failure coming'
at the top of the range as well? I can assure you not many…
Here's why…
Because we're taught to use CCI as a tool for reversals, or trend-reentry
(still a type of reversal) we're not taught that the breach of -100 and +100
actually means the stock, currency, commodity, or whatever is really
headed towards, or trading outside of the first standard deviation, which
is exactly when and where the steepest moves occur. We're taught to look
for CCI to cross back into the middle from above +100, or below -100.
I would like to argue; however, some of the best trades are waiting for
CCI to slip outside of +100 and -100 and then trading 'with the trend' or
with momentum, or 'volatility'. Then, when CCI comes back across +100

Mark Whistler • Volatility Illuminated • Page 140 of 363

and -100 (after we've participated in the trending move), we can close our
positions and let the 'containment-area trendless chop-chop traders' slug it
out.
On the top of the range, you will also quickly notice that we were
already in a descending trend when the EUR/USD was trying to make
new highs… But really, the EUR/USD wasn't making new highs, it was
just trading to the top of the Containment Zone in an already descending
trend, which is also likely, one of the best places to enter 'with the trend'
for those who just love those mean reversion 'CCI crossing back towards
zero' types of positions.
I don't know about you though, but there's nothing I hate more than
getting stuck in choppy lateral trading, so often, I look for the breakout, or
breakdown from the Containment Zone, after (and only after) an
identifiable trend is in place.
Okay… we should now see that at times, identifying trend (with CCI)
can be almost as easy as simply adding 1.25 standard deviations to our
charts and keeping an eye on BOTH CCI and the Containment Zone.
Why is it called the Containment Zone?
Because I just made it up… Okay, other than that, unless you have some
insight into fundamentals, volatility/probability, order flow, or hopefully
another technical analysis magic trick, the only thing you get in the
Containment Zone is a date with Mean Joe Green…
Where the 'mean' sits…is where the 'bulk' of our data should sit. The
'Containment Zone' is statistically (if we're measuring 1-standard
deviation on either side of the mean) where approximately 70% of the data
should reside. And in the case of the 1.25 standard deviations, we're really
looking at a little over 70%.
What I'm saying is if you're taking a position at, or near the mean,
without having a really good reason for doing so, the position could just as
easily reverse against you, as work in your favor. If you're on the mean,
you're on the hill, on the top of the triangle, at 50/50…tossing your cash
into the mystical Forex roulette wheel.
Mark Whistler • Volatility Illuminated • Page 141 of 363
 As I just stepped away from my screens for a cup of coffee… I realized
that perhaps I'm being a little harsh on old Mean Joe Green… There are
actually times when we can take a step into Green's house and walk away
unscathed… With the aforementioned in mind, we'll take a few moments
to show how we can take positions into the mean, while also using CCI in
a more traditional fashion. However, we're not going to use the 'same old'
one-line in an oscillator trick…
Just to be on the safe-side, we're going to overlay four CCI's to form the
'Quad CCI Strategy.'
Does this thing sound like a wicked new Bic® Razor, or what?

Standard Stan And The

Four Horsemen

When I first started writing about CCI a few years ago, there were only
two… Somehow, the dynamic duo grew into 'The Four Horsemen'. I guess
if I write a sequel to this book in a few years, there might be two more…
Maybe I'll call it: Six Pack CCI.
Yes, I know I'm not funny.
Jumping right in, over the following pages we will learn how to use
CCI to identify trend…to defeat false CCI signals, while also attempting to
time positions 'with the trend' both inside and outside the Containment Zone.
All of which can be efficiently accomplished by applying two four CCI
time periods to the same chart.
Our goals in doing so are to:
1. Prevent ourselves from taking positions against momentum.
Mark Whistler • Volatility Illuminated • Page 142 of 363
 2. Time our trades with short-term 'wrist-rocket' thrust from the larger
market momentum.
3. Clearly determine whether the trend is up, down, or sideways.
Foremost please note that I have provided MetaTrader code for 'two
CCI' at the end of the book, while having also made the code available on
www.WallStreetRockStar.com and fxVolatility.com.
After the code is copied into your MetaEditor / MetaTrader Indicator
folder, you should be ready to go. Also, please note that if you do not
have MetaTrader, you can simply stack four CCI indicators windows in
one of the various free charting applications available on the Internet. For
those who use the popular charting Website Stockcharts.com, you will
only be able to stack three CCI's one above and below the chart and one in
the actual chart window… I've already prepared a chart for you and you
can access it at:
http://stockcharts.com/h-
sc/ui?s=$INDU&p=D&b=5&g=0&id=p53666348969
Moreover the code I am supplying only contains two CCI's in one
widow, this is to prevent excess confusion with too much happening in
one oscillator window. To see all four CCI, please stack two windows, as
you will see I have done in the examples throughout the remainder of the
chapter.
If you are using MetaTrader (it's free, by the way… [and] some
brokerage demo accounts [United World Capital, for example] will allow
tracking stocks and commodities too), after you have placed the files in
your Indicator folder, please close and reopen MetaTrader. Assuming the
file is in the right folder, the indicator will show up in your "custom
indicator" drop down menu within your charts. Add the Two CCI code
twice, using 14 and 100-periods in the top window and 50 and 200-periods
in the lower window.
Standard Sam, the Deviation Man will help keep The Four Horsemen in
check as the trading day rolls out…

Mark Whistler • Volatility Illuminated • Page 143 of 363

 To see Standard Sam, please add a 50-period Bollinger Band(s) to your
chart, set at 1.25 Standard Deviations (STD). Also, as you have likely
noticed, I am using a chart of IBM (NYSE: IBM) to show that the quad CCI
strategy (really though, all of the strategies in this book) work with stocks,
futures, and commodities too.

Figure 6.5
As you can see, in the lower two windows, the 100-period and 200-
period CCI's are denoted in the thicker black lines, while the 14-period and
the 50-period are shown as the thinner in each window.

Mark Whistler • Volatility Illuminated • Page 144 of 363

 Then, on the actual price portion of the chart, you can see that I have
drawn the 50-period moving average and two 1.125 standard deviations,
which as you likely already have guessed, should line up with the 50-
period CCI as the casing of the 'Containment Zone'.
Readers should immediately notice that the two thicker CCI lines (the
200-period CCI and the 100-period CCI in separate windows) are both
traveling above zero.
Plain Jane, the trend is up. Here's what I would like to mention for
newer traders… If you're having trouble deciphering trend direction, drop
in quad CCI on an hourly or 4-hour chart …. If the two longer-term CCI's
(200 and 100) are above 0, common sense tells us there's more bullish
momentum, than bearish and vice versa for below zero. While this may
sound simple, don't scoff, I know plenty of 'tenured traders' who jump at
every volatility spike, like it's a massive trend change… However, it takes
more than a quick 'spike' to move the 200 and 100-CCI's above, or below
the zero line, thus the resilience of the indicator within itself, can be a great
buffer for 'on edge' nerves, analysis paralysis, and/or muddled vision for
whatever reason.
Looking at the below chart…

Mark Whistler • Volatility Illuminated • Page 145 of 363

 Figure 6.6

Traders seeking to take a position 'with the trend' can attempt to purchase
pullbacks on the mean (yes, Mean Joe Green) if:
1. Longer-term CCI (at least the 200 and 100) are above zero…
2. The 50-period CCI is not below -100.
3. Common sense seems inline.
What you will notice is that if we time our long-entry when the 14-period
travels back up from underneath the -100 area, we are using the shorter-
term indicator as a sort of 'wrist rocket' to step in just at the right time
when momentum is seemingly in our favor. What's more, by taking a
Mark Whistler • Volatility Illuminated • Page 146 of 363
position on the mean (while timing such with a 14-period pop back up into
the Containment Zone) we have also given ourselves a clear stop loss
point, should the market fall apart. We simply place our stops on the
opposite side of the mean, knowing a breach will likely have the pair
testing the lower end of the Containment Zone…
Please remember: The first loss is always the best loss.
Anyway, should the pair pop up into Standard Stan in the 1.25 area…
Once we're above the standard deviation level, we can actually use the
visual identification of the 'Containment Zone' as our stop to ensure we
exit the trade profitably…
Thus, savvy traders needed to only wait until the 14-period CCI
'reloaded' and crossed (the trigger) back above the -100 oscillator
containment area reentry point to implement long positions. What we 're
really doing here is using The Four Horsemen to guide our way…
The 100 and 200 are like big burly swordsmen, which are hard to budge
without significant force. The 50-period CCI is more like the guy who's
fast on his feet, but still tough enough to take on the big dudes… And the
14-period is similar to the scout of the party…
The fastest of the bunch, but also the first to turn-tail at any sign of
danger… Basically, when we see the 100 and 200-CCI stay above the 0-
line, we can infer there really isn't any reason for them to move out of their
range… The 50-period CCI will sometimes venture over the 0-line, before
the hefty battlers, just mentioned… However, the 14-period will often
venture (quickly) way out into the yonder…and he will always return to
tell his pals what he's found. Crossing back over the 100-line, traders can
take 'rocket trend reentry' positions (usually on the median); however, we
still want to keep an eye on the flighty 14-period CCI character… If he
crosses back over the +100 or -100 level he was just scouting, it means the
larger weighted CCI lines could soon to follow too, as the whole bunch
runs from larger momentum on the way…
Just to mention the opposite situation from what we covered in the two
charts above, if the 100-Period CCI were trading below the 0-baseline

Mark Whistler • Volatility Illuminated • Page 147 of 363

(meaning the stock, currency, or commodity is likely trading right at the
100-period moving average (mean) as well) and the 14-period CCI spiked
above the +100 oscillator level, the trader could look for a short entry,
assuming the 100-period CCI had not begun ascending (attacking the 0-
baseline), at the same time.
I'd like to mention that aggressively taking positions before CCI lines
actually breach the +100/-100 oscillator levels, falling/rising from
upper/lower extreme ends of the indicator window is extremely
dangerous.
Moreover, as the 1.25 standard deviation representation on the chart
shows, movement above +100 and below -100 could indicate a larger spike
of momentum to come.
With all of the aforementioned in mind, we will now look at one final
aspect of CCI – Identifying Reversals.

Identifying POTENTIAL
Reversals with CCI

Identifying reversals can be slightly trickier than timing 'with the trend'
positions, as anytime we are trying to take a larger contrarian position
against the trend, we are truly fighting momentum. However, as in life, all
things eventually -always- come to an end, trends eventually…stall…and
cease too.

Mark Whistler • Volatility Illuminated • Page 148 of 363

 Thus, to spot potential larger reversals at hand, we will use the +100
and -100 Containment Zone lines (again), applying the 100-period CCI;
however, unlike the above example, we will only use one CCI window,
instead of two. What's more, in our single CCI window, we will also draw
a 21-period CCI, leaving the 50-period and 200-period CCI's out. I'm
making this change for two reasons:

1. At times, we must 'switch up' the lens, which we're observing the
market from, especially if we are not seeing markets clearly.
Figure 6.7
2. Using the 21-period gives us a sort
of 'middle ground' between the
jittery trading action of the 14-
period CCI and the more stagnate
movement of the 50-period CCI.
Basically, if your intuition is telling
you a reversal might be on the
horizon, but you are not able to see
any real signs of such within news,
fundamentals, or your charts…you
can always switch-up timeframes,
or indicators (if even momentarily)
just to turn over a few more stones.

We're actually going to use the

longer-term 100-period CCI line as
inference and confirmation of a
potential downside and/or upside
reversal, even though the line may be
trading above (in the case of a bull trend), or below (in the case of a bear
trend) the +100 or -100 Containment Zone lines…

Mark Whistler • Volatility Illuminated • Page 149 of 363

 I'm not really a big fan of using the 100-period (or even the 50-period)
as an indicator of reversal, through mean convergence from outside the
Containment Zone… However, because what I'm now discussing is the
'usual' way CCI is used, I must mention it. Please keep in mind, that when
we attempt to identify a reversal with the 100-period appearing as if it is
about to cross from above or below the Containment Zone –back into the
Containment Zone- the seconds of data that transpire while the 100-period
is actually crossing back into the Containment Zone can be (what feels
like) and eternity of volatility with the currency, or stock bouncing around,
before finally making the move back into the mean. The bottom line is that
if we are going to trade reversals back into (and through) the Containment
Zone we must be prepared for excess volatility as traders duke out
uncertainty.
Anyway, the main rule is this: The 100-period CCI line must be trading
well above the +100-line level, or below the -100-line, before even thinking
about a reversal.
If the 100-period CCI has just barely traded above the +100-
containment line, and then fails, we might assume that simple mean-
bound choppy trading is really the name of the game in the near-term,
instead of looking for a larger reversal. (That is, unless some sort of
fundamental news has surfaced making us think differently.) What I'm
saying is if CCI is just "flirting" with the topside +100 oscillator level, but
did not make a pronounced move above, implementing a short position
would likely be more presumptuous than calculated.
To hammer home my point, when the 100-period CCI line is trading
'almost at', or above the -100-Containment Zone line, taking a short
position is a low probability scenario, as jittery trading could easily bring
about a pop up into the mean, or higher, where we would likely be
stopped out.
High probability (overbought) reversals [meaning the bull-trend could be
nearing an end and a sharp downside move could potentially be pending]
generally surface when both short-term (21-period) and long-term (100-

Mark Whistler • Volatility Illuminated • Page 150 of 363

period) CCI lines are trading well above the +100 oscillator level, or below
the -100 oscillator level.
When the short and long-term CCI lines are at the extreme ends of the
oscillator, 'trend capitulation' or 'the fifth wave,' in terms of Elliot Wave
Theory could be in effect.
I would like to mention that several years ago, it seemed like CCI rarely
moved above, or below -250, or +250 in the CCI oscillator; however, with
more volatility these days…the occurrence is commonplace. Thus, when I
mention 'extreme values' within the CCI oscillator window, we must
remember to use common sense, while also making sure to note that
increased volatility in the current market, could push values further above
and below +100 and -100 than in recent years.
You may have noticed in Figure 6.7, when the 100-period CCI-line was
trading well above the +100 Containment Zone line (not "just flirting" with
it), the occurrence foreshadowed a large reversal looming on the hourly
chart, which could have provided significant opportunity for savvy
traders.
What's more, you will also notice that the 21-Period CCI line crossed
BELOW 100-period CCI - while STILL above the +100-Containment Zone
line…and then subsequently fell under +100 towards the mean. In
essence, we are basically saying "I want to see longer-term momentum
rapped out with short-term momentum also overheated, before even
considering the possibility of looking for a reversal."
It's important to note traders will need to configure their CCI time
periods to best fit each chart timeframe traded; however, 21-period and
100-period CCI can be used as initial benchmarks.
Moreover, never ever, ever, ever, ever, ever, ever, ever trade without a
stop and never take on more risk your account can handle. When in doubt
stay out.
While there a many more examples of CCI trading, everything we've
discussed here are a great starting point for traders who are not only
seeking to help identify trend –in an effort to increase discipline– but may
Mark Whistler • Volatility Illuminated • Page 151 of 363
also help one identify reversals and most importantly…give additional
guidance when to 'stay out' of the game, should choppy mean-bound
trading seem in the cards over the near term.
With everything that we've covered in Part One of Volatility
Illuminated, I'm thrilled to now move into Part Two, where we will really
dive into volatility and probability, while also taking a very close look at
VWAP and of course WVAV and WAVE • PM.
The information you are about to read –as far as I know -is nowhere
else readily available for traders within markets, or on the Internet. I have
spent hundreds of hours preparing the following pages of Volatility
Illuminated.
The information you're about to read is NOT a re-hash of someone
else's stuff…
What you are about to read came from REAL trading, which I
discovered only after countless hours grinding it out in markets with real
money.
Some of the gems you're going to read about were discovered through
massive losses (always a great place to discover incredible insights) and
some were unearthed through long strings of wins- carving out similar
data (outside of traditional market knowledge) to refine and shape in
preparation of the information here.
What I'm saying is even if at the end of the book, you're like, 'geez, that
sucked, I'd like my money back,' I'm okay with it, because I plan on using the
information here in my own trading –because it was derived from REAL
trading– not sitting behind a 'strategy tester' looking back into history.
What you're about to read was uncovered with real cash, in real time
and I will continue to use the information with my own real cash, long
after you have put the book down. I hope you are able to take a ton away
from the following pages, though as always, please remember to trade
safely and of course: common sense is king.

Mark Whistler • Volatility Illuminated • Page 152 of 363

 Even though we're not even close to the end of the book yet, I would
like to mention that I appreciate you having purchased this book…
Should I swing for the fences [again] trading -when I'm like, 60; you sleep
easy knowing you helped pay for my room at the old folks home. I will do
my best to convert the Bingo hall into a trading floor though.
Anyway, I hope you enjoy Part Two, and please remember to keep an
open mind…

Mark Whistler • Volatility Illuminated • Page 153 of 363

 PART TWO

VOLATILITY
Illuminated

Mark Whistler • Volatility Illuminated • Page 154 of 363

 CHAPTER SEVEN
Information Acceleration
in the 21st Century and the
Volatility Paradigm
"Believe nothing, no matter where you read it,
or who said it, no matter if I have said it, unless it
agrees with your own reason and your own
common sense."

~ Hindu Prince
Gautama Siddharta

What if?
What if some of the information we believe is truth…is not…
Rather, please allow me a moment to rephrase…
What if the information we believe -as truth- is valid in some regard,
but to us -as traders- is not providing an accurate picture of reality within
markets?

Mark Whistler • Volatility Illuminated • Page 155 of 363

 In Chapter Three, we already covered how our own memories can play
tricks on us, how media can literally recreate our perception of past events
(shown in the poison tree example), we even saw how our emotions can be
cyclically altered through headlines and media.
What we have to understand…is that not all information is incorrect
and not information that we have might believe is false…actually is. In
reality, there is another variable happening here, which we did not touch
on in Chapter Three.
See, the entire paradigm of how we (and markets) receive information
has changed dramatically over the past 10, 30, 50 and 100 years.
To understand Volatility Illuminated, we have to look into information
–itself- in raw form, as we take it in daily.

I know the aforementioned sounds slightly cryptic, however, as you're

about to see, information has changed. Moreover, the 'speed of
information' has also accelerated, causing the critical mass of 'noteworthy
distributions' to alter in look, shape, size, smell, and impact, as well.
As you are about to see, credulous public acceptance of 21st Century
information and dangerous historical benchmarks are not only causing
greater potential fallibility and volatility within Government and markets,
but in our reception, digestion and action upon much of the information
we receive daily, as well.
In the end, we will never truly understand market volatility if we do
not come to a solid understanding that present-day mass-market and
public ignorance of the contemporary 'altered information' paradigm, has
created an 'explosive exponent' within trading, politics, economics, and even
sociology.

Mark Whistler • Volatility Illuminated • Page 156 of 363

 To illuminate the problematic circumstances I have just mentioned,
throughout Chapter Seven, we will see how even the major indices may be
presenting unclear information, how and why the larger information
paradigm has changed, and how all of the aforesaid is impacting markets,
trading and volatility overall.

After Chapter Seven, you should:

1. See why we must question the larger paradigm of the distribution
and reception of information by market participants, affiliates and
media overall.
2. Understand that often, extensive market volatility is the product of the
masses not understanding the true reality of the information they are
presented, misleading packaging of the information from the start,
and overall, a significant –unrecognized- change in the larger light-
speed information paradigm…over the past 100 years.
3. See how information and markets have changed in recent years, thus,
clearly recognize why understanding volatility and probability within
today's trading environment is absolutely critical to navigating
markets profitably.
4. Come away with firm clarity and understanding that those who trade
purely from technicals and/or fundamentals (retail, or institutional),
without attempting to understand the volatility paradigm surfacing in
modern markets, are setting themselves up for eventual failure.
See, populations, investors and even politicians often move in herds,
sometimes completely disregarding new and challenging information,
should the information require a change in belief structure and/or defy
comfortability, career, wealth, or socio-economic standing and status.

Mark Whistler • Volatility Illuminated • Page 157 of 363

 What I've just mentioned means when there is a dirty truth hanging
over markets, the masses usually ignore the occurrence for as long as
possible. However, when the larger potentially damaging situation can no
longer be ignored, the masses will again move 'en masse', with fierce vigor.
What we're talking about is panic…
To separate ourselves from the crowd in life and trading, we must take
the time to understand why and how the information paradigm has
changed. In the end, it is not enough to simply understand volatility
through traditional methods such as the Market Volatility Index VIX (a
measurement of market fear through option premiums); we must also
understand the theoretical and philosophical underpinnings of how mass
market volatility is created from the start.

Pre-Loading Major
Markets for Volatility

First in our discussion, I would like to take a moment to introduce you

to what you likely already know as a reliable benchmark of markets: The
Dow Jones Industrial Average (DJIA). As most are likely aware, the Dow
is comprised of thirty of the largest major public companies within the
United States. In essence, the DJIA is an 'average' of thirty stocks, all with

Mark Whistler • Volatility Illuminated • Page 158 of 363

'large cap' weighting, meaning their respective markets caps generally
exceed $5 to $10 billion.
As the Figure 7.1 shows, the DJIA is comprised of large name
companies most would recognize in a heartbeat.
Figure 7.1
On first glance, it makes sense
to trust the Dow Jones Industrial
Average as a valid benchmark to
track the U.S. economy and the
sentiment of investors through the
daily buying and selling of the
index. Moreover, it is also likely
fair to say that then the Dow moves
up, investors feel good about the
economy and when the Dow falls,
investors feel the economy is in
trouble.
Not so fast though, there's
something else happening here that
savvy traders will likely want to be
aware of.
Some argue that measuring the
'average' of thirty stocks is not a
true snapshot of the whole economy
and thus, does not accurately
measure the present-day health of
all sectors and business within the
United States.
However, in our never-ending pursuit of truth - and the true
underpinnings of volatility - we brush off the typical arguments both for
and against the DJIA in exchange for greater understanding of a perhaps
larger (hushed) problem looming under the surface.

Mark Whistler • Volatility Illuminated • Page 159 of 363

 The problematic issue with the DJIA actually has nothing to do with the
'total amount' of companies that make up the index… Rather, the knotty
concern with the DJIA is really in the way the index calculated from the
start.
Did you know there are basically five methods used to calculate
indices?30
They are:
 Market Capitalization Weighted Indices
 Modified Market Capitalization Weighted
Indices
 Price Weighted Indices
 Fundamentally Based Stock Indices
 Attribute Weighted Indices
Can you guess which of the previous five
methods is used to calculate the Dow Jones
Industrial Average? If you guessed 'price
weighted', you guessed correctly.
Traditionally, price weighted indexes are
calculated by summing the prices of all
components and then dividing by the total.
When the Dow kicked off way back in 1896,
there were only 12 initial components.
Charles Dow added up the prices of all the
companies and then divided by 12.
That's it, nothing to it! Figure 7.2

Over the years, 18 more companies were added to develop the present
total of thirty components. There's more to the story though…
The real meat to this tale is in the math behind how the Dow is
calculated…
Let's take an example where we have 10 companies in an index:

Mark Whistler • Volatility Illuminated • Page 160 of 363

 Looking at the Figure 7.2, we see that the total of all prices equals $355.
Moreover, by taking the sum and then dividing by the total (10), we end
up with an average price of $35.5, which would be the 'index value'.
But let me ask you a question, what happens one of the stocks split in
the index? Would it change the index value?
You bet it would. Figure 7.3

Moreover, given that the more expensive a

stock becomes, the more likely it is to split,
unless of course, it's Berkshire Hathaway.
For the sake of example, let us assume the
most expensive stock in our list, Company
5, splits. Instead of calculating the index
value with the previous $100, if we made no
other adjustments, we would use the post
split price of $50 in our sum of all the prices.
The new sum of $305 divided by the total
(10), would give us a new index value of
30.5, versus the pre-split index value of 35.5.
Because of the split, the index value is
now 14% lower than it was before the split,
however, nothing fundamentally changed
in the stock and really, not a single share
was sold in the whole process.
To overcome the loss in index value should a split occur, the Dow Jones
Company instituted the use of a divisor.

Mark Whistler • Volatility Illuminated • Page 161 of 363

Figure 7.4
The divisor is calculated by taking the post spilt
total of the prices and then dividing by the original
value.
For example, if we had 10 $100 stocks and one
component split, the divisor calculation would be
simply to divide $950 by the original $1000, which
would give us a divisor of 0.95.
Then, to calculate the actual index, the post split
sum of all stock prices is divided by the divisor,
which provides a more accurate price of the index.
In the case of our previous example, if we utilize
a divisor we would divide the post-split sum of
prices ($305) by the new divisor (0.87), bringing us
back to original total of $350. Then dividing by 10,
just like in our pre-split example, we would end up
with a correct index value of 35.5.
Thus, the divisor brings the sum of all prices
(reflecting splits) back to the correct pre-split
summed value of prices…for us to then divide by
the total components in the index.
The methodology I have just shown is a Price Weighted Index.
Sounds reasonable correct?
Not so fast. There is an inherent issue with this method.
Foremost, as time passes and more companies within the index split,
the divisor becomes smaller and smaller…
Normally small numbers aren't too scary right? Wrong.
Every time a stock splits in the Dow, the divisor becomes more minute,
thus creating even more volatility within the index.

Mark Whistler • Volatility Illuminated • Page 162 of 363

 Did I just use the word volatility? Yes I did. Volatility is in fact created
within the Dow Jones Industrial Average because of the way it is
calculated.
Let me explain… As of June 9, 2009, the Dow Jones Company
announced:31
The Dow Jones Industrial Average will be calculated with a new divisor
prior to the open of trading on Monday, June 8, 2009. The divisor for
the Dow Jones Industrial Average changes to 0.132319125 (from
0.125552709) as a result of the following actions:

• General
Motors Corp. (Pink Sheet: GMGMQ) is to be deleted from the
Dow Jones Industrial Average.

• Cisco Systems Inc. (NASDAQ: CSCO) is to be added to the Dow Jones

Industrial Average.

• Citigroup Inc. (NYSE: C) is to be deleted from the Dow Jones Industrial

Average.

• Travelers Cos. Inc. (NYSE: TRV) is to be added to the Dow Jones

Industrial Average.
After 113 years, so many stocks have split in the Dow Jones Industrial
Average, the divisor is now at an extremely low 0.132319125.
What does this mean to you?
Think about it for a moment, if a stock moves up $3 in a single day, the
occurrence would add 22.7 points to the DJIA closing value for that day.
($3 / 0.132319125 = 22.7)
Let's take a moment and step back from the situation though…to
consider the 'common sense' behind what's happening. If you have a $10
stock that moves $3 in one day, the stock would have individually gained
30% in the session. However, if you have a $100 stock that moved $3 in
one day, the stock would have gained 3% in one session.

Mark Whistler • Volatility Illuminated • Page 163 of 363

 Which is more likely- a stock gaining 30% in one session, or a stock
gaining 3% in one session?
The common sense answer is obviously that it is more likely that a $100
stock will move $3, over a $10 stock. Thus, because of the way the Dow
Jones Industrial Average is calculated, higher price stocks within in the
index have greater influence in the total value of the index. What's more,
the higher stocks move (within the index), the more rapidly the index
value climbs…or falls.
To gain the upper hand on the Dow, one could theoretically track the
top ten most expensive stocks on a daily basis for greater guidance into the
indexes' potential movement, versus just tracking the index by itself.
Why?
Think about it for a moment… If higher price stocks have greater
probability of larger price swings, and prices really have the greatest
impact on the index value, it would makes sense that we would more
closely watch the stocks that see greater day-to-day price swings, over the
lesser price components.
I will explain this in detail in a moment, first though, please note that as
of June 18, 2009, the components (and respective prices) of the DJIA were:

Mark Whistler • Volatility Illuminated • Page 164 of 363

Figure 7.5
Components of Dow Jones Industrial Average
COMPANY NAME TICKER PRICE
3M Co. MMM 59.37
Alcoa Inc. AA 11
American Express Co. AXP 24.64
AT&T Inc. T 24.04
Bank of America Corp. BAC 13.22
Boeing Co. BA 48.44
Caterpillar Inc. CAT 33.65
Chevron Corp. CVX 68.06
Cisco Systems Inc. CSCO 18.92
Coca-Cola Co. KO 48.81
E.I. DuPont DD 24.97
Exxon Mobil Corp. XOM 71.05
General Electric Co. GE 12.1
Hewlett-Packard Co. HPQ 38.35
Home Depot Inc. HD 23.52
Intel Corp. INTC 16.01
Intl Business Machines IBM 105.89
Johnson & Johnson JNJ 56.09
JPMorgan Chase & Co. JPM 35
Kraft Foods Inc. Cl A KFT 25.41
McDonald's Corp. MCD 58.17
Merck & Co. Inc. MRK 25.91
Microsoft Corp. MSFT 24.07
Pfizer Inc. PFE 15
Procter & Gamble Co. PG 50.64
Travelers Cos. Inc. TRV 42.08
United Technologies Corp. UTX 54.2
Verizon Communications Inc. VZ 29.66
Wal-Mart Stores Inc. WMT 48.17
Walt Disney Co. DIS 23.53

Index Value on June 19, 2009 8,539.73

Mark Whistler • Volatility Illuminated • Page 165 of 363

 Now, in Figure 7.6, please note the 'total impact on index value' of a one-day
1.5% gain in the top 10 most expensive stocks, over the top 20 least expensive
components (Figure 7.7).

Figure 7.6
Top 10 (Most Expensive) Dow Stocks

Company Stock One-Day Pt. Impact

Price 1.5% Gain on Index
Intl Business Machines 105.89 1.58835 12.00
Exxon Mobil Corp. 71.05 1.06575 8.05
Chevron Corp. 68.06 1.0209 7.72
3M Co. 59.37 0.89055 6.73
McDonald's Corp. 58.17 0.87255 6.59
Johnson & Johnson 56.09 0.84135 6.36
United Technologies 54.2 0.813 6.14
Procter & Gamble Co. 50.64 0.7596 5.74
Coca-Cola Co. 48.81 0.73215 5.53
Boeing Co. 48.44 0.7266 5.49
Total +70.37

All things being equal, a 1.5% move up in every stock in the Dow Jones
Industrial Average would equate to a +128-point gain in the total index
closing value.
Of the +128-point gain, the top 10 most expensive stocks would have
contributed to 54.93% of the gain, while the bottom 20 would have
contributed to 45.07% of the gain. Ironically, the top 10 stocks moved the
exact same percentage as the bottom 20 and yet have greater 'weight' on
the total index value.

Mark Whistler • Volatility Illuminated • Page 166 of 363

 Figure 7.7
Bottom 20 (Least Expensive) Dow Stocks

Company Stock One-Day Pt. Impact

Price 1.5% Gain on Index
Wal-Mart Stores 48.17 0.72255 5.46
Travelers Cos. 42.08 0.6312 4.77
Hewlett-Packard 38.35 0.57525 4.35
JPMorgan Chase 35.00 0.525 3.97
Caterpillar Inc. 33.65 0.50475 3.81
Verizon 29.66 0.4449 3.36
Merck & Co. Inc. 25.91 0.38865 2.94
Kraft Foods 25.41 0.38115 2.88
E.I. DuPont 24.97 0.37455 2.83
American Express Co. 24.64 0.3696 2.79
Microsoft Corp. 24.07 0.36105 2.73
AT&T Inc. 24.04 0.3606 2.73
Walt Disney Co. 23.53 0.35295 2.67
Home Depot Inc. 23.52 0.3528 2.67
Cisco Systems 18.92 0.2838 2.14
Intel Corp. 16.01 0.24015 1.81
Pfizer Inc. 15.0 0.225 1.70
Bank of America 13.22 0.1983 1.50
General Elec. 12.1 0.1815 1.37
Alcoa Inc. 11.0 0.165 1.25
Total +57.73

What we're talking about here is an index that is preloaded for

volatility, especially if old market adage of higher prices over the long haul
holds true. Fact is, as the prices of the individual components in the DJIA
climb, the more volatile the index becomes, given the present price/divisor
paradigm.
With the aforementioned in mind, we can assume that the higher the
DJIA moves:
1. In terms of point swings, the daily moves will be greater.
2. Media hype will only increase in years to come, as 200, 300, 400
and 600 point swings begin to surface -daily- in the index.
3. The index has been 'artificially pre-loaded' to gain-ground.

Mark Whistler • Volatility Illuminated • Page 167 of 363

 Point number three in my last statement hopefully caused a few readers
to raise their eyebrows… I did -in fact- say 'artificially pre-loaded to gain
ground.'
Please allow me a moment to clarify… In the fall of 2007, the Dow
Jones Industrial Average hit an all time high of 14,198.10, obviously before
U.S. mortgage markets fell through the floor, and before the entire
financial crisis really unfolded. By June of 2009, the DJIA was down about
40% from the 2007 high.
Funny thing though…if you remember the divisor announcement a few
pages ago, we also know in June of 2009, two stocks were removed from
the index, and were replaced by two new companies.

The announcement read:

• General Motors Corp. (Pink Sheet: GMGMQ) is to be deleted from
the Dow Jones Industrial Average.
• Cisco Systems Inc. (NASDAQ: CSCO) is to be added to the Dow
Jones Industrial Average.
• Citigroup Inc. (NYSE: C) is to be deleted from the Dow Jones
Industrial Average.
• Travelers Cos. Inc. (NYSE: TRV) is to be added to the Dow Jones
Industrial Average.
Let's take a moment to consider the reality of the situation here… In October
of 2007, General Motors posted a relative high of $41.93, while Citigroup tagged
a high of $45.09 in the same month…
By June of 2009, General Motor's stock was trading at $1.75, while Citigroup
was trading at $3.17.
In all, from October of 2007 to June of 2009, General Motor's stock lost 40
points (-95.8%), while Citigroup had peeled off 42 points (-93%). Here's the thing
though, if you remember our discussion a moment ago about the DJIA being
'price weighted', using the pre-June 9, 2009 divisor of 0.125552709, the total

Mark Whistler • Volatility Illuminated • Page 168 of 363

point declines of General Motors and Citigroup contributed to 653 points of the
5,658.37 points lost in the DJIA, since the October 2007 highs.
So how would the Dow ever climb back to a level where media and investors
would ever pay close attention to the index again, if Citigroup and General
Motors stocks are likely to stay under $10 for a long, long time? What do you
think the solution is?
General Motors and Citigroup were 'black eyes' for the Dow, and considering
it is much, much tougher for a $40 stock to add $10, versus a $100 stock, both
stocks were poised to remain as major drags on the index for years.
What I'm saying is if a few of the stocks in the index have been beat up
considerably (like fallen under $10), wouldn't the occurrence make it much
harder for the Dow to ever post new highs again, with the cheaper stocks
weighing heavily on the total index value?
You know it.
Dump the losers and replace them with stocks that have a better chance of
gaining ground. The higher the new stocks climb, the more points they will add
to the total index value.
Bingo! General Motors and Citigroup were kicked to the curb and replaced by
Cisco and Travelers.
Fact is, as of June 9, 2009, because Citigroup and General Motors were
booted from the Dow, the index now stands a greater chance of recouping losses
(and eventually making new highs) than if the flailing bank and auto
manufacturer were still a part of the benchmark index.
When the Dow eventually climbs back to new highs, media will likely tout 'the
bull is back' or something like 'you can't keep the Dow down' (or whatever),
however, media will likely forget to mention the mega-money center bank that
was replaced by a property & casualty insurance company and the 'American as
apple pie' auto-manufacturer that was replaced by a network and
communication devices company.
What's more, when considering that there's no longer any auto-
manufacturers in the Dow now, it seems awkward to assume the index truly

Mark Whistler • Volatility Illuminated • Page 169 of 363

reflects a fair breadth of products used in the calculation of consumption and
GDP growth – in America.
At the end of the day, if every time the Dow pulls back in an economic hiccup,
'beat-down' stocks are replaced by others that hold greater potential to ascend,
the event really means the index will likely make new highs –again- in the years
to come, but not truly reflect the American economy, as it is said too.
Analysts will continue to tout 'the investor who bought Dow stocks and held
them over the past fifty years has seen his portfolio continually climb, even with
the crash of 1987, the dot.com bomb and the financial crisis.'
But what they won't tell you is part of the reason the Dow is able to keep
making new highs –decade after decade– is the lesser performing components
are dumped like a bad date, any time the kitchen gets hot.
Eventually, the Dow will hit new highs and day-to-day volatility (in terms of
price swings) will be greater than ever. Really, we're talking about preloading
volatility into markets.
In a few years, when the Dow is back at highs… Citigroup and General Motors
will likely still be in the gutter trying to recover.
There's even more to the story though…the volatility story, I mean… As I've
just pointed out, the way the DJIA is calculated –and preloaded- is all geared to
help the index constantly make new highs over time. New highs mean new press
and new press means more exposure. It's about maintaining 'benchmark status',
while keeping investors interested in…investing. However, much like our
memories are easily influenced by media (in recollection of historical events) the
Dow example is another instance of 'important information' completely passing
by the general public. Given the larger financial crisis, political events of the day
and everything else one must constantly worry about, why would the calculation
of an index ever even be important to take note of? What we're really talking
about is the total mass of information required for investors to truly stop and
mark as important. In the 21st Century information paradigm, unless an event
has enough 'sauce' to spark significant fear (loss) or exuberance (greed) within
individuals, the information passes like a shooting star on a cloudy night.
Eventually, the DJIA will likely hit new highs and media will again gawk and
squawk about the event, thus sucking investors into the poison tree –yet again-
Mark Whistler • Volatility Illuminated • Page 170 of 363
and of course, eventually the economic cycle will take a downward turn and
those same investors will see their wealth decrease, as major indices take
another nosedive.
I'm not saying that we shouldn't invest…after all, now that the DJIA has been
'reloaded' for possible upside, the present day actually appears to be a decent
time to buy…at least if the U.S. Dollar doesn't plummet in the near future, due to
the loss of credit quality of U.S. Treasuries, based on excessive spending by the
Government…but that's another conversation.
The point, however, is we can certainly invest in markets and indices, so long
as we are fully cognizant of the volatility paradigm. Moreover, we must also
recognize that the larger problematic issues behind how the delivery and
reception of 'information' has changed in the 21st Century, while actively seeking
out information that could present future volatility – ahead of time.
As many readers may still be a little unclear about the larger shift in the
'information delivery and reception' paradigm I keep mentioning, we will now
cover 'why' and 'how' the aforementioned has changed and what it all means to
markets and volatility.
Over the next section, we're going examine Einstein's Theory of Special
Relativity to see how information has changed and at the same time, how such
impacts markets.
However, please do not feel that you need to work through the math; really,
the most important part is to simply just make sure to take the time to
understand the philosophical and theoretical underpinnings (as pertaining to
markets and volatility) behind the physics.

Mark Whistler • Volatility Illuminated • Page 171 of 363

 Market Volatility through
EINSTEIN'S THEORY OF SPECIAL
RELATIVITY

I'm sure many readers are wondering how Einstein is relevant to

markets and volatility… Moreover, those who aren't too fond of math
likely already have their fingers into the next chapter, ready to skip over
the following pages at the first sign of big brainwork. However, please
know what we're about to cover is very important in the larger
understanding of macro market volatility and how individuals,
professionals and markets collectively receive and act on (or discard)
critical information.
As we are about to see, information actually does have 'mass' and with
the technological innovations of the past few decades, the overall formula
behind the energy of information moving markets has changed.
What I'm saying is because information is now moving at the speed of
light, market volatility is increasing (and will likely continue to swell), as the
larger populous is progressively more inundated with even more
information… Moreover, as the masses continually become exceptionally
trusting of, and more dependent on media, while at the same time (and
unfortunately), gradually more neglectful of taking the time to personally
seek out 'real information' about to impact their lives…

Mark Whistler • Volatility Illuminated • Page 172 of 363

 As you're about to see, the 'postmodernism' of market moving
information is a troublesome condition of 'see no evil, hear no evil, don't
want to deal with any evil', causing markets (especially Forex) to present
more and more volatility (seemingly out of the blue) every day. Moreover,
because the masses prefer to turn their heads at information containing
real warnings within markets, when bad news can no longer be ignored,
markets tumble…fast.
Don't be discouraged though…because as long as you're willing to see
information and markets clearly, you're one of the few…now 'in the know.'
We will begin our discussion of physics and the larger 'light speed
information' paradigm with Einstein's Theory of Special Relativity, taking
special notice of Mass Energy Equivalence (E = mc2) and Length
Contraction.
As a quick side note, E = mc2 is not 'the' Theory of Relativity, as many
believe…
In reality, E = mc2 stands for Mass-Energy Equivalence and is one of four
derivatives from Einstein's 1905 paper: Zur Elektrodunamik bewegter Körper
(On the Electrodynamics of Moving Bodies).32
The aforementioned paper attempted to define the structure of
spacetime, via Special Relativity.
Spacetime –as a loose definition- is a mathematical model, or theory
attempting to mold space and time into one continuum.33
While E = mc2 is not the core concept I am presenting here, the theory of
Mass-Energy Equivalence and Special Relativity do have a few points we should
note in terms of information in the 21st Century, financial markets and volatility.
Just as a quick primer, within the Theory of Special Relativity, we find four
major consequences:34

Mark Whistler • Volatility Illuminated • Page 173 of 363

 → Relativity of Simultaneity: Two events, simultaneous for two
observers, may not be simultaneous for the observers, if the observers are
in relative motion.

→ Time Dilation: Moving clocks should theoretically, tick more

slowly…than an observer's "stationary" clock.

→ Length Contraction: Objects in motion, as measured in relative

width from the stance of an observer, will shorten…in the direction they
are moving with respect to the observer.

→ Mass-Energy Equivalence: E = mc2, energy and mass are

equivalent and transmutable.
Quickly walking through each of the four points of Special Relativity:
1. When examining Relativity of Simultaneity, at some level the
theory holds true within markets, as the overall concept tells us that
simultaneity is not absolute, rather is dependent on the observer's position.
2. Time Dilation means the faster something moves, the more time
slows down for the thing in motion. If you were standing on earth and
you could see a spacecraft moving on the other side of the universe - and it
was/is moving at the speed of light…

In fifty years of your life, the spacecraft might cover 30 percent of your
visible sky.
However, for the people in the spacecraft, because they are moving at
the speed of light, in the same fifty years, they would have aged
significantly less. What the theory is saying is time is relative to the
location of the clock; in other words, time is relative to frame of reference.
What the theory is also implying is without another reference point,
time will remain constant. The issue here (with the way the Dow is
calculated too), is we do actually have a constant frame of reference, by

Mark Whistler • Volatility Illuminated • Page 174 of 363

which we base time off of, derived from the simple fact that none of is
moving -or has moved- at the speed of light (or even remotely close to it)
anytime in the past 100- years. (And likely since the beginning of time, unless
there's something I'm missing.)
Here's something to consider though… In 1909, a devastating press
release sometimes took days -even weeks- to reach the investing masses,
given the lack of mass communication, as seen today. Let's say, for
example, it's 1909 and in your previous life, you were JP Bigwig…and you
controlled a massive position in coal all across America, especially in the
Appalachians.
While you're in Canada fishing, a freak earthquake hits your largest
coal investments, devastating production.
Because it is 1909 –and you're in the woods fishing, your team can't
exactly call you on your cell…
See what I'm saying?
In modern markets though, information travels exponentially quicker
(and more efficiently) via fiber optic cable, satellites, television, cell
phones, and Internet...
The speed of information has increased, though time is still the same as
it was in 1909. Consider what's really happening…information is –
literally- now traveling close to 300,000 kilometers every second. How fast
is that? If I were light, I could circle the globe seven times in one second;
or about 28 times, in the four seconds (by my estimate) it is taking you to
read this sentence.
In 1909, information often traveled at the speed of old Jeb and his
sidekick in the wire-house. Jeb got the wire and then told some kid to run
around and tell others. The kid's name was Flash.
Humor aside, what we have to understand, is because the information
has increased in speed, while time remains constant, the occurrence has
changed the 'mass' element of market moving information, and thus, is
causing increased volatility within markets. A few physicists might argue

Mark Whistler • Volatility Illuminated • Page 175 of 363

with me, but they don't trade with real cash every day, watching how
events impact markets every second… From the laboratory of the trading
floor, the empirical evidence shows information is moving so fast, most
slips by unnoticed, until the mass is just too big to ignore.
As I am about to show, the theory of Length Contraction will provide
us with some proof that that 'mass' of information has changed. Then,
later in the chapter, I will show how volatility (through the mass and
speed of information) has increased overall, by examining major historical
moves in the Dow Jones Industrial Average over the past 100 years.
Again, what we have to understand is because information is now
moving at the speed of light, another variable within relativity absolutely
must have changed. The variable I am speaking of is the larger ignorance
and passivity of society, through complete inundation of information,
whereby information is ignored until the total mass of such threatens
critical impact, either through fear, or exuberance.

Figure 7.8

3. Length Contraction means the faster something moves, the more it

compresses in relation to the observation of a stationary viewer.

Mark Whistler • Volatility Illuminated • Page 176 of 363

 Figure 7.9
Take a moment to glance at the image of
Mr. Stick Trader (Figure 7.9), though
please don't laugh at my artwork! In the
theory of Length Contraction, the faster an
item moves in relation to the observer, the
more it will compress.
In context: For a stationary individual
or securities trader for example, the little
black box moving from left to right (in the
image above) is slightly more than three
times the width of the stick figure's head.
Now, look at Figure 7.10 on the following page…
If the little black box accelerates to 85% of the speed of light, the box
would appear only about one and a half times wider than the head of Mr.
Stickman Trader.
Here's where the story gets interesting… Consider that perhaps the 'thing'
is information.
Figure 7.10
In the early 1900's, when the Dow Jones
Industrial Average was just getting off the
ground, information really only traveled by
wire and/or telephone. For example, in
1906, the telephone industry put in a record-
breaking achievement completing the first-
ever long-distance underground line call,
totaling 90-miles from New York City to
Philadelphia.35

Mark Whistler • Volatility Illuminated • Page 177 of 363

 Today, however, information moves much, much faster… Case in
point, information virtually moves at the speed of light through fiber optic
cable.36 Fact is, in our world, information travels 40,000 miles into space
and back creating, "a pause of about half a second between speaking on a
transatlantic phone call or live television link and your voice reaching the
listener."37
Because the speed of information has accelerated dramatically over the
years (traveling at the speed of light today), in context of Length
Contraction, the increase in speed of information means the total breadth
(mass) of information has shrunk.
Let me rephrase that, because information is passing by so quickly each
day, the amount of time we pay attention to information (because the mass
of passing information has compressed) has decreased. What I'm saying is
with more information passing through our perceptions daily, information
is here today and gone tomorrow, with the public quickly forgetting
whatever just passed by our consciousness. We quickly forget, or simply
fail to take notice of information –until– the information has so much mass,
the game changer can no longer be ignored.
Again, if you are still standing in the same place and information has
accelerated, what is it that has changed?
Mass changed…

Mark Whistler • Volatility Illuminated • Page 178 of 363

 Critical Mass and
Conscious Unawareness

For the public to take notice of any information as 'significant', the

information must have substantially greater mass today, than in historic
years of the markets. In reality, what has changed is the total deterioration
of the general public's memory of yesterday, active cognizance of today
and even more worrisome, any thought of tomorrow, based on the speed
of information in today's Internet world.
In plain language, with information moving so much faster today,
whatever the 'take notice' event is, it unfortunately must be a whopper- to
stick. Unless the information contains some sort consequence to our
immediate life, the information is quickly forgotten (or ignored) all
together.
Though I believe your memory is better than most, please simply state
what you ate for lunch one week ago from today? [Don't worry, I can't
remember either.]
I will cover the larger populous-oblivious paradigm in detail in the next
chapter. Moreover, I will show exactly why and how the speed of
information is not only causing the average individual to become less
aware of social veracity within business, politics, and community, but also
why and how the occurrence has triggered an epidemic of volatility within
financial markets.
What we must understand for now though...is perhaps the global
financial crisis has less to do with credit, mortgages, and lack of regulation,
than most believe.

Mark Whistler • Volatility Illuminated • Page 179 of 363

 In essence, the ugly economic matters at hand are truly about rapidly
passing information overlooked by the public daily. Furthermore, with
major media constantly promoting fear and gloom (such was true before
the financial crisis too) most individuals protect their sanity by simply
disregarding negativity.
The problem though, is as a society, we have manufactured a condition
where all warnings of pending disaster (to the global economy based on
the non-existence of credit swap regulation, for example) are completely
ignored unless the walls totally start crumbling.
Concerning the present financial crisis, in the years just before the
entire debacle began, the public acted just as it should, turning cheek to the
potential global credit clutter looming, to protect the fragile emotional
state of modern acceptance-based socio-economic egocentricity, all fueled
by the increased speed of information within today's reality.
What I'm saying is this: Who cares about some credit issue a thousand miles
away when we work 10 to 12 hours a day, only to then run around all evening in
a frenzied state of chic productivity too?
Think about it, with so much information to take in each day, how
would the average Joe even have known to take notice of the credit-based
warnings surfacing from tenured professionals (prior to the entire global
financial meltdown) anyway?
Because the average Joe and Josie are as busy as heck and completely
bombed with information all day, there is simply no way he or she can
even take in all of the information presented in the first place. And,
because modern media attempts to make every single little story a huge '
bombshell', the average person has virtually no way to distinguish the
really important information they should be taking notice of, over the
constant media fear and exuberance clutter. Therefore, he (or she) picks
what matters most…

Mark Whistler • Volatility Illuminated • Page 180 of 363

 We pay attention to now and five minutes from
now…at least…until a cataclysmic bolt from the blue
completely rocks all of our lives collectively.

It's important to also note Newton's Laws of Motion apply as well,

specifically in relation to force. As measured by Newton's Second Law of
Motion, force = mass * acceleration.
What this means is we will also need to measure 'acceleration' in terms
of the verve of information within today's marketplace.
As you are about to see, we can theoretically model Einstein's theory of
Mass-Energy Equivalence (E = mc2), deriving some semblance of energy
needed to account for 'acceleration' within the force required to move
markets.
In understanding the theories here, readers are about to gain some
incredible insights into the truths behind volatility, social passivity,
information purpose/deployment, speed and financial market reactions to
global events and media... Truths many may have never even thought
possible.

Mark Whistler • Volatility Illuminated • Page 181 of 363

4. E = m c2
E = the energy
m = mass
c = the speed of light in a vacuum (celeritas),
(about 3×108 m/s)
In terms of Joules: 1J = 1 kg * m2 * s-2
Just in case you're wondering:
Walking speed - 15 mph
Bicycling speed - 23 mph
Airliner cruising speed - 625 mph
Speed of sound (at sea level) - 761 mph
Speed of light - 670,616,629 mph

However, because information has increased in speed, are we now in a

state where:
E = m((∆si+∆ki)/c)2
Where…
E= Energy (Volume)
m = Market Cap
∆Si = (Si) Change in the Speed of Information
∆Ki = Fear/Acceptance of Information Presented (Measured through
option premiums, or the Market Volatility Index VIX)
c = the speed of light in a vacuum (celeritas), (about 3×108 m/s)

Mark Whistler • Volatility Illuminated • Page 182 of 363

 While the above formula is not meant to be a precise model of physics,
the theory behind what I am saying is:
Volatility is -in essence- a measurement of energy, in relation to mass and
speed, in terms of information.
It is arguable then, that the greater an item's mass, the more energy it
takes to create and sustain speed, in a circumstance where resistance
prevails. In the case of any financial product, there's an old cliché that we
can use to help understand volatility a little more…

"No one ever has to buy, but they do have to

sell…sometime."

What we're really talking about here is the amount of energy needed to
keep a stock, currency, option, or futures contract at any given level. With
the absence of buying incentive/pressure, all instruments would
eventually fall to zero.
Again, Newton's three laws are:38
1. Every object will remain at rest or in uniform motion in a straight
line unless compelled to change its state by the action of an external force.
2. Forces produce accelerations that are in proportion to the mass of a
body (F=ma).39
3. Every action of a force produces an equal and opposite reaction.
For the purposes of this book, what we're rally examining in terms of
volatility rests within law #2, whereby we know Force equals mass times
acceleration.

Mark Whistler • Volatility Illuminated • Page 183 of 363

 Simply put, the heavier an object is, the more force one must exert to
'start the ball rolling', or stop the boulder from tumbling.
Like the major indices were putting in all time highs in 2007 (as the
general public just stood by and ignored the totality of the dangerous
credit situation growing, which was also seemingly 'implausible' by
mainstream media that was clucking about, while touting new highs
daily), when the larger 'mass' of the global credit hydrogen bomb could no
longer be ignored, the same media and public all panicked at the same
time (October of 2007) and en masse, tumbled markets over a cliff.
Even the credit rating agencies played there part too, as seen in
Moody's downgrade of AIG on October 3, 2007, precisely the 'panic'
catalyst required to sweep the legs out from underneath the Dow and drag
the index under critical support of 10,000.40
What we're talking about is the point of unsustainable information
(mass), where even media, credit ratings agencies and investors must
finally come to grips with the reality at hand.
Henceforth, buying energy (in relation to exuberance and/or conscious
ignorance by the larger public to truly understand economic
circumstances) is more difficult to sustain than selling, based on the logic
that investors have to sell sometime, but they never truly have to buy.
What we have is a 'gravitational effect', which tugs hard on stocks,
currencies, options, or futures the higher they travel in a defined timeline.
In addition, much like it is much more difficult to push a boulder up a hill,
than down, the larger the boulder, the greater the possibility of excess
volatility when the mass becomes too heavy to hold up, or the general
public is no longer able to coherently understand the information at hand.

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 Remember our conversation about consumer sentiment and inflation in
Chapter Three. It's no wonder the average Joe wouldn't even know to be
on the lookout for inflation, as he or she, likely hadn't studied the
saturation principles of money supply and were really only basing their
opinions on the junk media was touting at the time…
Moreover, in December of 2008 and January of 2009, mainstream media
were more focused on deflation, than inflation.
In terms of our previous discussion of Length Contraction, the little
snippets of information (the clues to upcoming rallies, or pending panics)
pass by seemingly unnoticed because information is now moving at the
speed of light. However, when a piece of information finally passes by
that is so large that it can no longer be ignored, the masses, media,
analysts, politicians and credit ratings agencies act on the information in
one large herd of lemmings…over a cliff…

The Tipping Point of

Information Mass

As stocks, currencies, options and even futures rip through the roof, all
are (as a metaphor) traveling into the atmosphere, like a rocket. The
further the rocket moves from the earth, the less gravity 'weighing' it down
and thus, the acceleration becomes more torrid. (Have you ever noticed
the fifth wave in Elliot Wave Theory is generally always the steepest?) A
stock can never totally escape the forces of gravity, though we can admit

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that momentum begets momentum. Much like the upper echelons of our
atmosphere, even though gravity eases as the object seemingly 'breaks free'
(almost mass-free from the perception of investors), other factors begin to
come into play.
For instance, the higher a financial instrument travels, the greater the
'risk premium' in terms of fair valuation, seen through financial ratios.
Eventually, once the last fool is in, buyers mysteriously dissipate,
seemingly overnight. However, in the final stage of 'rocket gains' just
before the stock runs out of fuel, media hype and investor exuberance was
likely at its greatest.
Really, no fuel contains as much octane and/or potential horsepower as
exuberance. Much like nitrous fueling a hot rod in a street race though,
the power unleashed often tears apart the motor at the same time.
When the last bull realizes he's nothing more than a sucker, suddenly
the 'mass-free' paradigm shifts and investors suddenly see the situation in
true light for the first time… Where mass was previously ignored,
suddenly it is apparent that the moon is seemingly crashing through the
atmosphere…but investors have nowhere to hide. The object now
colliding with reality is too big.
When the 'rocket like run' is out of fuel – media yells fire in a crowded
movie theatre and the masses pile on top of one another in an attempt to
all escape at the same time.
There's another factor that plays in here too:
Conversion.
A few moments ago, I said the greater the mass of an object, the more
energy required to 'get the ball rolling.'
There's a conversion factor here we have to consider. As we know,
most financial instruments do not start out as large, or mega-cap
companies. Metaphorically, small cap stocks are like baseballs, while large
cap companies are like bowling balls.

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 Image this: I hand you a baseball and a bowling ball and ask you to
throw each as far as you can. Which would you be able to toss further? A
baseball of course. What if; however, the baseball was actually 'magical'
and as it was in the air, shifted shapes- into a bowling ball?
In reality, baseballs and bowling balls are static matter; however,
financial instruments are not. The higher a stock, currency, option, or
futures contract travels, the more it expands, adding mass. In the case of a
stock, we can measure mass accumulation through market cap growth. If
shares outstanding remain the same, as market cap grows, so must price.
There is an equilibrium point though, where the stock (via earnings per
share) can no longer sustain itself, and thus plummets back to earth, like a
rocket with no fuel (the absence of buyers.)
Where all of this leads us to is simply a question of energy required to
sustain altitude, like a satellite. The issue is that unlike a satellite orbiting
earth, stocks can never escape the gravity of earnings expectations, the
reality of returns, and of course, larger economic cycles.
Currencies are bound to GDP and expectations for GDP growth,
inflation and of course: interest rates.
Should a currency travel too high, the occurrence could negatively
influence a country's trade balance, whereby an overvalued currency will
eventually trigger a trade deficit and thus, negatively affect GDP.
What's more, when trade deficits drag out for significant periods, not
only will the occurrence hinder GDP growth, but often lead to increased
national debt.
The conversion tipping point of a currency is when the country's
national debt is seen as 'unsustainable' by foreign lenders, and thus the
currency plummets, as credit quality deteriorates.
Central banks supposedly act as a mechanic/driver to currencies,
adding or subtracting fuel (via interest rates and other open market
operations); much like a balloon-driver does propane to a hot air balloon.

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 However, what if the balloon driver was either an idiot from the start,
or is/was really taking orders from someone who would profit from the
balloon plummeting?
Either way, the absence of competent, honest, reality cognizant balloon
drivers (non-lobbyist/media influenced, not seeking personal prosperity,
beyond ego-driven and/or not disgustingly greedy individuals,
policymakers, politicians and corporate executives) means the whole
experience is going to be one hell of a rough ride (volatility.)
Think of the occurrence as an equilibrium point within Forex markets,
where a central bank must know how to apply heat to keep the balloon
from sinking too low (or rising too high), while also understanding that
when used incorrectly, the flame could catch the entire balloon on fire.
If the balloon driver were competent from the start, the balloon wouldn't be on
fire right now.
Examining another instrument, options, on the other hand, can be
measured in terms of 'expectations of volatility', as seen through option
premiums.
Option floor traders are very, very smart fellows – and in my option,
are some of the savviest of all traders (of course with the futures guys too),
as they understand profitability is more about buying and selling
volatility, than tumbling in on the directional hype bandwagon of fear, or
exuberance.
Option traders get it…that trading is about volatility, not directional
fear, or greed.
Option traders profit by selling the probability of credulous investors
feasting on poisonous fruit…over and over and over.
So where am I going with all of the aforementioned?
Foremost, to truly profit within equity markets, options, Forex,
commodities and futures as individual investors we need to wake the hell
up, stop buying into media hype (because they don't really know anyway),
stop ignoring smaller snippets of critical information passing by at light

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speed, and above all, start looking at markets in terms of volatility and
probability.
We must start looking at markets in terms of speed (information), mass
(distributions), and acceleration (expectations).
The Dow Jones Industrial Average stands a much greater chance of
recovery today, now that the two worst performing stocks have been
replaced with seemingly healthier components.
But has anything really changed within the economy?
No.
However, as the Dow gains ground again, media will tout recovery.
But the index didn't really wait patiently for the recovery of the two worst
performing components, rather, General Motors and Citigroup were just
replaced like burnt fuses in the index.
What we're talking about is pre-loading markets for volatility, by
sweeping the ugly dust under a rug.
But the dust is still there and so are Citigroup and General Motors,
which collectively employ over 500,000 people.
If -and when- the Dow rallies again, most investors will plop cash into
markets (while media touts recovery), completely unaware of the fact that
all of the index components didn't really 'recover'.
Fact is, two companies that are STILL thought of major U.S. economic
contributors (though potentially holding index down in the future) were
quietly discarded in the night, like a mobster does a dead body.
None of the aforementioned means we can't profit handsomely from
markets in the future, we just have to be aware of the situation unfolding
now.
We have to understand that because information does have a tipping
point (as do markets), and because most information surfacing through
media is most often wrong, (with the real market-moving catalysts
ignored), we must stop paying attention to media hype and start paying

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attention to volatility and probability. In the end, by waking up to the true
mass-credulous, media-suckered paradigm of today, while also paying
attention to volatility and probability, we can finally transcend the larger
'mass-populace ignorant of light speed information' paradigm now facing
investors in the 21st Century.
Now, please take a moment and look at Figure 7.11, which shows the
three largest declines in the Dow Jones Industrial Average from 1896 to
1909… As readers will likely immediately recognize, the index
experienced some whopper declines during the previously mentioned
period.
Figure 7.11

If we take note of the major declines at the start of the 19th Century,
there are a few major points we can learn from. First, big drops in the
Dow (and market) aren't new… Selloffs happen.
They happened when the Dow first began trading and they happen
now. The second point; however, will need a little more explanation.

Mark Whistler • Volatility Illuminated • Page 190 of 363

 Figure 7.12

* I've included 1946 and 1998, which showed similar

characteristics of typical historical bear market selloffs

Readers may have also noticed that I annotated the 'total time of selling'
for each relevant decline. Please also now take a moment to glance over
the next table I've prepared (Figure 7.12), which shows every major decline
in the history of the Dow Jones Industrial Average, which exceeded 20%.*

Over the past 100-years of the Dow, we can break trading action up into
four periods, each with their own 'characteristic' paradigms:

1896 to 1929: Industrial Revolution economy.

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1929 to 1961: Post Great Depression American economic growth
market, characterized by "middle game" industrial development and
The Securities Act of 1933.

1961 to 1981: Baby Boomer's come into their own entering colleges and
taking positions in workplace. Era characterized by mass
acceptance/distribution of televisions, and thus, the initial birth of the
'light speed information' paradigm, as noted in 600 million American's
having watched Neil Armstrong become the first man to walk on the
moon, on July 21, 1969.41 Era also included the invention of the
personal calculator (1966) and the release of the first consumer
computers (Scelbi & Mark-8 Altair and IBM 5100 in 1974 and 1975).

1981 to Present: Technology Explosion Market.

In the popular Website How Stuff Works, writer Marshall Brain lists 12
major technologies of the 1980's as:42

 Personal computers
 Graphical user interface
 CDs
 Walkmans
 VCRs
 Camcorders
 Video game consoles
 Cable television
 Answering machines
 Cell phones
 Portable phones
 Fax machines

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 Here's some interesting information not readily in the minds of most…
In my second book, Trade with Passion and Purpose (Wiley, 2006), I
had the wonderful experience of interviewing Joe Ritchie, whom some
may recognize from New Market Wizards, by Jack Schwager. I won't ever
forget the time I spent interviewing Ritchie, which was really a series of
conversations over about two months. Ritchie is truly one of the greatest
market innovators of all time, as one of the very first to computerize option
valuation and merge the information into his firm's trading on the floor of
the CBOT. During the 1980's and 1990's, Ritchie's firm Chicago Research
and Trading (CRT) took over $1 billion in trading profits out of markets.
I also interviewed Ritchie for my column in Trader Monthly Magazine,
which unfortunately, has gone out of business with the global financial
crisis.
In my interview with Ritchie, he referred to traders on the floor of the
CBOT (in 1977) with programmable calculators, as instantly becoming, "a
one-eyed man in the land of the blind."
With everything mentioned in over the past few pages in mind, my
point is that while technology has indeed progressed over the past 100-
years, so has Wall Street's ability to act on, and react on information…
However, traders and firms who are now truly technology to benefit in
day-day-day market activity are rare. Though the average investor
believes he, or she has 'greater insights' into markets with their
supercharged trading platforms, I believe the exact opposite is really the
case. Really, average investors of today are less savvy than 100-years ago,
while really, having just become nothing more than media induced
volatility-conditioned chimps. I'm even talking about intraday retail Forex
traders who think they're savvy chartists.
Case in point, remember our recent discussion on CCI? In one of my
recent Webinars, I asked the room of traders (about 40-people) what CCI
indicated… The ONLY answer I received was 'overbought' and 'oversold'
above or below +100 and -100, respectively. Not ONE of the supposed
Mark Whistler • Volatility Illuminated • Page 193 of 363
serious traders knew what CCI really was. I don't mean to be rude and I
hope I don't sound like I'm attempting to be.
However, what I'm saying is, 'what the heck are overbought and oversold'
anyway?
I'll tell you what they are…Overbought and oversold are the
explanations of CCI presented to the masses by 99% of market-information
Websites out there…
Chimpanzees beget chimpanzees.
To break this devastating trend, we must look beyond the
commonplace explanations of indicators and trading served to the public
daily.
Moving on, to the below table of major declines in the Dow Jones
Industrial Average (shown again), I would like readers to take serious note
of final column on the right labeled 'Avg Time'.

Figure 7.13

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 What I would like to point out is that the average duration of bear
markets has decreased by nearly 60% since the 1901 to 1929 market.
What's more, if we take out the larger total bear market from 1999 to 2002,
bear markets in the past 20 years have only lasted about a quarter of the
time that they did in the past 47 years.$
What we can assume –over all- is bear markets, though totaling 'about
the same' in terms of percentage loss, are accelerating in duration.
Why?
Because fundamentals improve quicker today, over 75 years ago? No…
Duration of sell offs has decreased in total time, because through the
acceleration of information, collectively, investors have a much narrower
memory of yesterday, with media constantly pumping exuberance
through television, Internet and radio the second the economy shows signs
of recovery.
What's more, take into consideration the fact that the Dow Jones
Industrial Average has now been 'reloaded' for volatility, the second the
index fires over 10,000 again; the occurrence will become headline news…
Guaranteed.
Will you buy into the volatility?
Information has accelerated, and thus our memory of yesterday has
declined, while at the same time, the collective public's ability (and
desire/effort) to take notice of important micro-information (that could
have major impact on the future) has decreased.
What I'm saying is… Not only have markets become more volatile (as
noted in the increase in total time of DJIA bear markets); but speed and
volatility of intraday and longer-term market changes are only going to
increase even more in the years to come…
$ -Note- The historical average PE ratio for the Dow Jones Industrial Average is 15.5 (since 1929).
In early 2002, despite dot.com bomb selling, the index still had a PE of 25, thus overvaluation
contributed to the longer than usual bear market. Index changes in 2009 instantly lowered DJIA
trailing PE from 21.21 to 11.41, while also dropping forward PE from 18.06 to 12.80, thus setting
the index for a future run into (approx) 11,700, or a 15.5 historical PE.

Mark Whistler • Volatility Illuminated • Page 195 of 363

 The fact that 99% of the investing public has no idea of events like the
DJIA having been re-loaded for gains is proof of the pudding of the
general public's micro-information mass ignorance, with your old pal
'media' doing nothing to bring you the real truth behind the events of
today… At least, until some sort of underlying hum within markets can no
longer be ignored, and the major indices are crushed once again…
Perhaps something like the United States' National Debt of $11 trillion (FYI,
foreign investors owned $3.47 trillion of public debt, at the time of printing), the
potential pending deterioration of credit quality in U.S. Treasury notes…and the
implosion of the greenback.

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 CHAPTER EIGHT
Volatility and Probability
through the movement of
Distributions

Over the following pages, we will focus on volatility and probability in

terms of Forex markets; however, the concepts also apply to equities,
options, commodities, and futures. As many traders are already aware,
Forex markets often display significant volatility catching many
participants by surprise. However, with a simple understanding of
descriptive statistics, traders could soon find themselves ahead of the
curve.
Many traders – both new and experienced – often find themselves at a
loss attempting to understand why Forex markets tend to experience
extended volatility both intraday and over the long haul. In simple terms,
much of the seemingly erratic moves are really the product of institutional
order flow, causing larger movements within markets. While the
aforementioned explanation is almost infuriating simple, we must
understand, large money is really the pure catalyst behind extended
movements within markets, not at-home investors. We can argue that by
acting in unison on common technical signals, the mass army retail
investors do indeed add to the issue of erratic volatility within markets.
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 However, volatility caused by the retail community is 'quick-shot'
volatility at, or near areas where commonplace technical signals (like
Stochastics rolling under +80, for example) unfold. What's more, quick-
shot volatility caused by retail traders
is not 'trend sustaining', as really,
institutions are the only entities with
enough buying or selling power to
prolong trends.
Moreover, the individual investor
is often set up for failure from the
start, because not only is he or she not
able to 'see' institutional order flow
(imagine the ticker tape in equities),
but because traditional 'pre-loaded'
information he/she is receiving is
often 'missing' critical components,
all at the same time.
The question is then, how can
traders transcend failing technicals,
increasing volatility and jaded
information- to achieve greater
insights and perceptions into serrated
movements within Forex.
In other words, "How can we
perceive volatility before it occurs?"
Over the following pages, I will
attempt to explain how using
principals of descriptive statistics can
help identify trending and reversals, while also foreseeing volatility within
almost any charting timeframe.

Mark Whistler • Volatility Illuminated • Page 198 of 363

 In the end, we will break through market volatility with a greater
understanding of the dynamic movements of subset distributions, while
also utilizing common probability within descriptive statistics to capitalize
on market action.
It is important to note that even when traders embody substantial
technical and fundamental knowledge, risk prevails without the proper
understanding of the larger probability and volatility paradigm behind
currency trading.
Here, traders are encouraged to boldly challenge typical pre-conceived
notions of technical and fundamental analysis, in an effort to see beyond
'the accepted standard' retail traders are told to believe daily. The
'accepted standard' does not presently uphold volatility and probability as
important aspects of markets or trading. However, given that 80% to 95%
(depending on who you talk to) of retail Forex traders lose, while many
retail brokerages actually take the opposite side of their trades, perhaps the
at-home trader isn't supposed to know anything more than the 'accepted
standard'.
Traders who understand descriptive statistics though, will find greater
clarity and perception of volatility within intraday and longer-term
movements unfolding in markets.

Mark Whistler • Volatility Illuminated • Page 199 of 363

 Words of Caution
 Within Forex and trading, there is no holy grail; thus, please do not
read the following with the firm belief that you will never again be
faced with confusion, unclear volatility, or losses in markets. What
you are about to learn is an incredibly effective guidance tool
helping identify trending, volatility and at times, reversals;
however, even the concepts here must be used with prudence and
common sense.
 You are about to read about descriptive statistics, which within
itself has many different approaches, methodologies and studies. I
will not delve into the justification of math underneath most
statistical concepts here. Instead, I am presenting descriptive
statistics from a simple, conceptual framework. However, there
are many resources available to explain the empiricism of
descriptive statistics on the Internet and in your local library; you
will also find plenty of recommended reading in the bibliography
at the end of the book, should you chose to learn more about the
subject (which I highly recommend).
 Never forget that economics and fundamentals rule all…at least, over
the long haul. Traders who do not take the time to properly uncover
the true economic paradigm within markets –and the future
possibilities of such– will likely often find themselves on the wrong
side of the trade, especially those who hold positions during longer
timeframes. While the concepts presented within Volatility
Illuminated are designed to specifically help traders navigate intraday
movements and volatility within markets, we have no excuse to ever
slack on our fundamental research. Please take time to do the proper
research every day.

Mark Whistler • Volatility Illuminated • Page 200 of 363

 Transcending Markets
through Volatility and
Probability

Almost all financial markets display relentless volatility for traders

attempting to capitalize on trading within shorter-term timeframes.
Intraday uncertainty and volatility are just facts of trading in virtually
every market. Moreover, because of the inherent underlying "volatility
paradigms", many traders (both new and seasoned) stand significant risk
of unforeseen losses, almost any moment their positions move against
intraday order flow.
In Addition, while order flow may not seem like a reasonably
transparent variable in Forex, in reality, through descriptive statistics, we
may not only predict when and where institutional order flow could
commence, but where such could end as well.
In the end, through volatility and probability, savvy traders will learn
to 'ride the waves' of order flow within markets.
At some level, I expect these concepts to be met with resistance, as
traders find difficulty in leaving 'the old notions' of technical analysis
behind.
By this I mean, often when 'the accepted standards' are challenged,
some have trouble letting go of the information that has been taught as
reliable for so long, even if it's flawed. However, reiterating Henrik Ibsen's
famous statement from the 1882 play An Enemy of the People, "the majority
is always wrong."

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 From the shoes of most retail traders, many likely find themselves
continually frustrated from confusing signals from technicals, which often
seem completely misleading in real time. For some strange reason though,
many retail traders continue to believe (or perhaps want to believe) in their
'accepted standard' technicals, despite the losses surfacing in their
accounts.
Really, technical analysis is only true so long as enough people are
acting on the same information at the same time. However, as we saw in
Chapter Two, technicals are actually failing in today's market, because too
many people are acting on the same 'pre-set' information at the same time.
Here's where we start to level the playing field…
We will no longer look at charts as instruments of trading… producing
'signals', which we trade from.
Instead, we will look beyond the charts.
We will firmly resolve to understand that by looking at charts
whatsoever, we are viewing data and the translation of data and nothing
more…
We will also resolve to stop looking at magical technical patterns
(hyped, invalidated signals some schmooze is selling), or bogus Expert
Advisors (EAs) that do not and/or cannot justify their existence from some
sort of understandable framework of descriptive statistics, mathematics, or
physics.
In addition, while I've already touched on the aspect of price action as
'data', the concept must be revisited briefly… just in case.
The 'data' is so much more than just price action, in reality, 'the data'
is screaming aloud…begging us to stop and pay attention for a moment…
The data is saying, "If you take a moment to truly look into me, I
provide significant insights into probability/volatility, order flow and
fundamental underpinnings…truly moving markets."

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 Fact is, technicals generally only perceive events in the past...
Traditional technical analysis' predictive worth is nothing more than hope
that an event that occurred yesterday, will happen again.

Really, technical analysis is the study of information that has already

occurred, without any regard to the probability of what could truly
transpire in the future.
In essence, technical analysis is nothing more than the study
repetitive pretty pictures throughout history.
Unfortunately, there are those who will continue to argue traditional
technical analysis can predict tomorrow… Concerning most signals
though, when the technician is asked 'why will it work again?' most
explanations will sound like:
"Because it worked in the past."
Humbug.
Technicals work perfectly when studying historical charts; I agree.
Nevertheless, the one time you attempt to trade from one of the supposed super-
signals… I can assure you, will be the one time the signal will fail.
Have you ever entered a trade based on an overbought or oversold
indicator, only to see the trade move against you?
In the amazing book Technical Analysis for the Trading Professional,
author Constance Brown inquires, "How did I miss such an obvious signal
like that one?"

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 How many traders ever really look into 'why'
what is happening - is actually happening?
Repeatedly, I see traders completely disregard
the philosophical, fundamental, mathematical
and common sense reasoning behind the
charts they trade from.
I can assure you that when these traders and
investors grow sick and tired of losing money,
they will finally either quit, or start putting in
the time. Regardless, trading purely off
technicals is similar to looking for Braille in
the drive-thru.

Using our earlier discussion of CCI as an

example, when (for example) the EUR/USD
begins ascending and CCI travels above +100,
traders who have based their understanding
of the indicator on 99% of the commonplace
explanations available, one would believe the
EUR/USD is now entering 'overbought'
territory.
In reality, the EUR/USD (on whatever timeframe being viewed) is
simply moving outside of (about) the 1st standard deviation mark, which
really means 'distribution potentially on the move.'
The same logic applies to expectant fundamentals, in that enough
people have to believe in a future outcome for the actual trading action to
mimic the "perceived outcome" by those same people.
Even more devastating though, when fundamentals shift, often, many
technical traders are not even aware that the occurrence has taken place

Mark Whistler • Volatility Illuminated • Page 204 of 363

and thus, find themselves not only on the wrong side of the trade, but
often stopped out at exact high and low prints of the relative range too.
When we begin to understand descriptive statistics not only allow us to
intuitively 'feel' the true fundamental sentiment behind the market, while
also overstepping the simple 'hope', which too often comes from
traditional charting, we begin to see that both technical and fundamental
perceptions of the larger market are actually transparent within the data
unfolding before our very eyes.
Descriptive statistics are defined as:43
[1]Descriptive Statistics are used to describe the basic features of the data
gathered from an experimental study in various ways. They provide simple
summaries about the sample and the measures. Together with simple graphics
analysis, they form the basis of virtually every quantitative analysis of data. It
is necessary to be familiar with primary methods of describing data in order to
understand phenomena and make intelligent decisions.
Various techniques that are commonly used are classified as:
• Graphical displays of the data in which graphs summarize the data or
facilitate comparisons.
• Tabular description in which tables of numbers summarize the data.
• Summary statistics (single numbers) which summarize the data.
I ask, "How can anyone make an intelligent decision in markets, without
understanding the data at hand?"
See, so many traders use technical analysis to decipher their entry and
exits without truly evaluating the logical validity of the technical signals
surfacing.
What's more, tack on complete oversight of the common sense
economic fundamentals and truly, it's no wonder retail traders are often
stopped out at the top, or bottom…or just plain wrong altogether.
The aforementioned aside, let's discuss how technical analysis also
completely overlooks vital "real data" traders need most.

Mark Whistler • Volatility Illuminated • Page 205 of 363

 Principally, we know technical analysis is a "lagging event," meaning
the action unfolding on charts can only exist insofar as another event has
already occurred.
In short, an equity, index, option, commodity, futures contract, or
even currency must have already witnessed a trade 'print', before the
data ever even shows up on a chart.
Which came first, the chicken, or the egg? In the world of trading, a
transaction MUST always take place before the instance shows up on a
chart.
(To split hairs, one might argue the two events are simultaneous. however, a
transaction can take place without the existence of a price chart, but a chart cannot
exist without a transaction, or series of.)
Really, the true wealth in technical analysis is the identifiable and/or
representative display of empirical data unfolding, otherwise known as
descriptive statistics.
When we change the way we think about what we are seeing on charts,
we change our total understanding of technical analysis, especially 'hocus
pocus hope indicators' and/or methodologies built for failure from the start.
When we begin to understand that by viewing and analyzing the data
displayed on charts, from a stance of descriptive statistics, we will begin to
see that we can completely discard the mainstream technical crap foolishly
embraced as the 'accepted standard,' and instead start measuring and
utilizing volatility and probability as tools for profitability.
I hope that readers understand why I'm beating a dead horse… We
must understand that the accepted standards of trading tools presented to
the retail crowd…are flawed.
So how do we overcome the issue through volatility and probability?
First, we must also understand that all data, all price action we empirically
see on our charts is:
1. Data coming forward tick by tick.

Mark Whistler • Volatility Illuminated • Page 206 of 363

 2. When summed, creates a series of smaller subset distributions,
within larger distributions.
3. No different, or more complex, than any other data measured by
statisticians.
How is it we can predict weather patterns, and yet, mainstream media
and general populace investors can't see the Dow tumbling downward
through 10,000 one week in advance?
Anyway, in our discussion of descriptive statistics, we really only going
to focus on the concept of 'normal' (bell shaped) distributions…
The application of normal distributions applies to trading insomuch as
the data we are measuring is constantly moving with the periods we are
studying.
What I'm saying is because a subset distribution's mean (seen through
a moving average, for example) is constantly in motion, as prices rise and
fall, the 'data' (prices) will never stay skewed on one side of the mean, or
another.
When studying smaller subset distributions, eventually the data will
cross back over the mean (moving average); because within markets, our
means are never totally stagnate.
The 'traveling factor' behind a moving mean proves that the data we are
measuring will eventually return to the mean, perhaps even crossing
above, or below, possibly even extending significantly in the opposite
direction.
It is the concept of the mobile mean (where old data is replaced – i.e.
the newest day of a 50-period Simple Moving Average forcing the 51st day
to drop off) that justifies measuring volatility through standard deviations
under the premise of a normal Gaussian curve. (Really, we're talking
about the Central Limit Theorem.)
What's more, as John Bollinger points out in his book Bollinger on
Bollinger Bands, the Central Limit Theorem tells us that even when long-
term data is not normally distributed (as is the case with virtually every

Mark Whistler • Volatility Illuminated • Page 207 of 363

financial instrument, including Forex), "a random sampling will produce a
normally distributed subset for which the statistical rules will hold."44
In short, smaller samples within the market will not produce the
kurtosis of the larger data set.45

Gaussian Curve Revisited

Within descriptive and inferential statistics, we will use a random

normal distribution (Gaussian Curve) to measure volatility via standard
deviations. In terms of the Gaussian Curve, we are looking at a
normalized distribution, where the sum of all values of x, are meant to
equal 1.
The previously mentioned means if we are measuring price movement
within 21-periods on a 5-minute chart (for example), the result should
equal a probability of 1.
In other words, the sum of all values that have transpired in the
measured period should present a probability of 1 (an empirical absolute)
that the events have happened. What we're referring to here is a probably
of 1 that all of the data presented will rest within our chart, regardless of
where the data is within the chart. As long as the data exists, we're in
business on a probability basis.

Mark Whistler • Volatility Illuminated • Page 208 of 363

 Figure 8.3

Moreover, by using historically measured occurrences of data, we can

statistically infer the probability of future events.
I need to clarify a question a few readers might have lurking in their
heads… In my previous attack on traditional technical analysis, I pointed
out that if one were to ask a technician why most traditional technical signals
were valid, he or she, would often be stuck without a proper response, other
than that of the signal having shown to work in the past.
So why, for heaven's sake, is this statistical junk any better? As I
already mentioned, I'm not going to write a novel showing the
mathematical justification for volatility/probability; however, I believe
some explanation is required for peace of mind.
In statistics, the concept of authenticating data is known as classical test
theory, predictive, or concurrent validity.46
Concurrent Validity is, "An index of criterion-related validity used to predict
performance in a real-life situation given at about the same time as the test or
procedure; the extent to which the index from one test correlates with that of a
nonidentical test or index; e.g., how well a score on an aptitude test correlates with
the score on an intelligence test."47

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 What we're looking for is the theoretical outcome (on paper) to return a
high correlation value (correlation coefficient) to the real world
information presented daily.
How will we do all of this?
As you are likely already aware, data within a Gaussian Curve is
measured via 'standard deviations' from the mean.
The arithmetic mean, of course, is the average of all prices recorded in
the period we are studying. Thus, by being able to calculate the average
prices for a particular period, we can also measure probability of
movement away from the mean through standard deviations (confidence
intervals) and thus, the probability of all data truly resting within our
distribution, validating our previous concept that all of our data (in the
timeframe measured) should total 1.
If you remember your old statistics days, you may also recollect that the
majority of all data occurrence probability falls within three standard
deviations of either side of the mean. What we know is that 49.86% of all
the data should rest within three standard deviations of each side of the
mean.
In translation, measuring three standard deviations on both sides of the
mean, equates to 99.72% of the data within the period measured.
In other words, there is a 99.72% probability that all of the data will fall
within three standard deviations of the mean.
Breaking the standard deviations down, there is a 34.13% probability
our data should rest on one side (above, or below) of the mean. Moving
out a little further, there is a 47.72% probably that all of the data will sit
within two standard deviations of one side of the mean, and a 49.86%
probability that all of the data will rest within three standard deviations of
one side of the mean.

Mark Whistler • Volatility Illuminated • Page 210 of 363

 Figure 8.4

However, while there is one standard deviation to the left of the mean
(above a moving average, in the case of trading charts), there is also one
standard deviation to the right (below), and thus, we know to multiply all
of our probabilities by two, compensating for data on both sides of the
mean, not just one.
There is a 68.26% probability all of the data will sit within one standard
deviation of either side of the mean, a 95.44% probability all of the data
will rest within two standard deviations, and a 99.72% probability of all
data in our period measured will reside within three standard deviations
of either side of the mean.
In terms of measuring the 'mean' for this chapter, we will only be using
Simple Moving Averages and not Exponential Moving Averages (which
put more weight on near-term price data, over the latter.) It's true
Exponential Moving Averages track price action more closely, however,
we're keeping things simple here…

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 I think John Bollinger presents a great argument for using Simple
Moving Averages in his book Bollinger on Bollinger Bands, asserting that
we are simply adding one more variable to an already complicated
scenario, by using Exponential Moving Averages.
I'm not saying that you shouldn't use EMA's, but for these pages (at
least for now), we're going to keep things clean and simple.
As many likely already know, a Simple Moving Average (SMA) is
created by summing the data (close prices, for example) for any given
period and then dividing by the total number of periods aggregated.
For example, on a five-minute chart, a 20-period SMA will present the
arithmetic mean (average) of all closing prices for the past twenty 5-minute
bars at the location of the mean, on the current bar.

Figure 8.5

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 The Simple Moving Average, is thus, the 'mobile mean', which we are
basing our standard deviations (confidence intervals) from, attempting to
measure total 'probability' of breadth, or 'wingspan' of the data unfolding
on a chart.
As Figure 8.5 shows that we are seeing 'more than just a moving average',
rather, we are seeing a visual representation of the "mean data range" over
the past 20-periods, where we will uncover key statistical data to volatility
and probability.
In essence, we are able visually map the middle point of our data curve,
by charting a Simple Moving Average.
With the mean identified, we must now identify benchmarks
(confidence intervals), in an effort to validate our probability distributions,
as accurate and usable within trading. We're really talking about mapping
the 'distribution' of data through standard deviations.
Moreover, we are also mapping the actual distributions to be able to
answer the question of why implementing probability not only accurately
reflects the past, but is also incredibly useful in attempting to perceive the
future, over standard technicals.
In essence, the distribution is really a sort of teeter-totter (unfolding
around the mean), where we are able to actually see how the data is
unfolding on our chart.

Mark Whistler • Volatility Illuminated • Page 213 of 363

 Figure 8.6

In terms of inferential statistics, we also know there should be a 99.7%

probability that all of the data (in the period measured) will rest within
three standard deviations of the mean…
As the below chart shows, other than two small blips outside of the
lower 3rd standard deviation, almost all (99.7%) of the data does indeed
rest within 3-standard deviations of the mean.

Mark Whistler • Volatility Illuminated • Page 214 of 363

 Figure 8.7

Just incase Figure 8.7 was a little confusing, Figure 8.8 (on the following
page) shows a clearer picture of Gaussian Curve concept on an actual
chart.
Please note that I used a 20-period Simple Moving Average (SMA) to
measure the Gaussian Curve in Figure 8.7.
Looking at Figure 8.8, traders will notice that when we simply overlay
three representative curves (denoting the 1st, 2nd an 3rd standard
deviations) with the mean being the 20-SMA, we see how the Gaussian
Curve looks when mapping actual data.

Mark Whistler • Volatility Illuminated • Page 215 of 363

 Now though, let us think of the Gaussian Curve in another format…
Let us imagine the curve as an actual "teeter-totter" like scale, which will
shift higher and lower on the left and right sides, as the data moves from
side to side.
The question is how we will measure, or map the data shifting from
side to side on the teeter-totter? To provide any insight into ascending, or
descending prices, we must have some way to map distribution data
shifting, thus prompting the teeter-totter to lean in one direction, over the
other.
As a solution, we will simply map a shorter-term subset distribution
within a longer-term distribution. As the shorter-term distribution moves
from right to left on the larger teeter-totter, the result should be for the
larger teeter-totter to fall to the left, as the bulk of data begins to add
pressure, thus denoting trending…
Think of it like this… Suppose we're standing in a part looking at a big
teeter-totter called
the '50-period
seesaw', which is
for the most part,
well balanced.
Now imagine I
walk up to it with
a box of bricks
labeled '20-period
stones' and dump
the load on the far
left side of the
teeter-totter, what
would happen to
the larger 50-
period seesaw?
Figure 8.8

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 It's a no-brainer of course, the larger teeter-totter would lean to the
left…
With a little shameless marketing in mind, I'm going to call the teeter-
totter the Whistler Trending Scale (WTS). Moreover, just to make sure the
point of moving subset distributions is absolutely clear, please again
imagine a larger teeter-totter sitting idle in a park, with both sides
suspended in mid-air equally…
We can generally assume all things are relatively calm (or normal) in
that one side is not dramatically higher, or lower than the other.
However, if I were to set my neighbor's super big chunky ice-cream kid
on the left side of the totter, what would happen?
Everything you own in a box to the left. Now, if you imagine the larger
teeter-totter is 50-periods of data, what happens when I slide 20-periods of
data to the left?
The key point to note in the WTS, is simply that when the shorter-term
data (measured by a 20-SMA) moves to the left of the 50-SMA (longer-term
mean), the scale should tip down to the left, thus denoting a bull trend.
 Data to the left: bull.
 Data to the right: bear.
 Data significantly flanking either side, but headed back to the center:
Mean reversion.

Mark Whistler • Volatility Illuminated • Page 217 of 363

 Figure 8.9

Historically, the instance of a short-term distribution sliding from one

side of the totter to the other is known as a "moving average crossover". In
effect, Moving Average Convergence Divergence (MACD), comprised of
12 and 26-day moving averages is an example of a short-term distribution
mean sliding back and forth across a longer-term average.
However, it is important to note that what we are not doing here is
simply looking for instances of a short-term distribution crossing over a
longer-term mean for a trade signal.
Again, what we are not doing in our study of volatility and probability
is simply using mean (moving average) crossovers for signals. Not only
would the signal be lagging, but likely constantly setting us up for failure
as our traders were stopped out on pullbacks surfacing almost
immediately after taking a position.

Mark Whistler • Volatility Illuminated • Page 218 of 363

 Instead, we will be using distributions (and the outliers of distribution
width) to measure potential future volatility probability and current
'acceleration' volatility/probability within the short and long-term mass
(distributions), we are measuring.
Moreover, we will use the outliers of distribution width (total mass
width), by means of standard deviations, to identify trend entries and exits
for trending and/or potential consolidation to come.
(Note: The areas shaded more darkly in Figure 8.9 are simply to point out the
second and third standard deviation outliers of the 50-period distribution.)
If you are having trouble with the larger concept of sliding
distributions, please take a look at Figure 8.10, where I have rotated the
WTS 90 degrees to the left. The image
again shows how when a shorter-term
distribution slides to the left of the
mean, whatever instrument we are
measuring…is taking on a 'bullish
bias', and vice versa for distributions
sliding to the right. Again, we are not
looking for 'moving average
crossovers' here at all, we simply
taking note of the occurrence of
sliding distributions.
Moreover, instead of eying the
precise traveling of the moving
averages, our trading clues will come
from the expansion and contraction of
the standard deviations framing the
various distributions.
Figure 8.10

Mark Whistler • Volatility Illuminated • Page 219 of 363

 How do we map standard deviations? As you may have already
guessed from Figure 8.7, we can simply apply Bollinger Bands (the actual
application of standard deviations on a chart); however, we will not be
using the typical settings commonly pre-loaded within charting packages.
If you are not aware, Bollinger Bands are really the 'application' of the
standard deviation formula to charting. I sometimes think many retail
traders never truly understand how powerful Bollinger Bands really are,
simply because the name is slightly misleading…
Don't get me wrong, John Bollinger is a genius and one of my greatest
market inspirations, however, what we're really seeing is a probability
distribution measured through the actual expansion and contraction of
standard deviations. For the sake of keeping our terms clear, over the
following pages, we will call Bollinger Bands 'volatility bands'. Again
though I believe Mr. Bollinger is nothing less than a market genius,
however, like so much information surfacing in markets today, many
investors are missing the power of indicator (based on probability theory
and statistics) as most explanations of the tool are incredibly misleading.
Here's an example:
One major Website defines Bollinger Bands as:
"A technical analysis technique in which lines are plotted two standard
deviations above and below a moving average, and at the moving average itself.
Because standard deviation measures volatility, these bands will be wider during
increased volatility and narrower during decreased volatility. Some technical
analysts consider a market which approaches the upper band to be overbought, and
a market which approaches the lower band to be oversold."48
There we are with our two favorite words again: overbought and
oversold. Whoever wrote the above definition has obviously never traded
with real money… Foremost, Bollinger Bands (volatility bands) expand
and contract because of the squaring of the exponent in the standard
deviation formula, which causes a 'multiplier effect' in the bands. What's
more, even remotely inferring that when price touches the upper, or lower

Mark Whistler • Volatility Illuminated • Page 220 of 363

bands means 'overbought' or 'oversold' is fairly incorrect, at least as
presented to average Joe-Q-investing public. Obviously, a 7-period
distribution will have significantly less mass than a 50-period distribution;
thus, usually when price touches the second standard deviation of a 7-
period distribution, price is likely just starting to near the 1st-standard
deviation of a 50-period distribution.
Do you see what I'm saying? The concept of 'overbought' and
'oversold' is relative to the period measured… I hate to pick on details, but
the little snippet of information the mainstream investment education
Website left out…is pretty darn important.
Geesh…
I'm not kidding, this stuff keeps me up at night…
With the previously mentioned in mind, I would like to note that the
WTS is literally a scale of common sense, showing that when we add
weight to one side, the occurrence creates motion whereby the scale shifts.
What I'm saying is the tag of the second standard deviation on a short-
term distribution does not mean price is oversold, the occurrence likely
means the lesser distribution (in terms of periods measured) is shifting on
the scale and price is moving…
To clarify the actual movement of a distribution, as seen in price action,
in Figure 8.11, you will notice I have drawn a 20-period moving average
and a 50-period moving average, the former with volatility bands at 3.2
standard deviations, and the latter at 1.2 standard deviations. (It is
important to note that when drawing volatility bands on charts, we must
always set our standard deviations slightly above where we normally
would, to account for data loss in the electronic application of the formula.
By this I mean, we want to set the 1st-standard deviation at 1.2, the second
at 2.2 and so on.)
In terms of the WTS concept, we immediately see the 20-period
distribution is now above the 50-period mean, obviously denoting the
teeter-totter has leaned to the left, or in other words, the EUR/USD is
experiencing bullish trading action. There's more to the story though…

Mark Whistler • Volatility Illuminated • Page 221 of 363

Remember the previous discussion of data probability (in relation to the
mean), measured through standard deviations?

Figure 8.11

Looking at Figure 8.11, we know through probability 99.7% of all our

data should theoretically rest within 3-standard deviations of the mean. In
the case of our 20-period distribution, if a sharp selloff were to occur in the
next bar, where do you think the selling action would likely pause, at least
temporarily?
Probability tells us…likely on the lower 3rd-standard deviation of the
20-period distribution, which is coincidentally sitting almost precisely at
the mean of the 50-period distribution.
However, as witnessed in the chart, just a short while ago, price
actually tagged the upper 3rd-standard deviation of the shorter-term
distribution, before commencing the present consolidation… The event of
price hitting the third standard deviation did not mean the EUR/USD was
oversold, rather, the occurrence just meant fierce buying was attempting to

Mark Whistler • Volatility Illuminated • Page 222 of 363

push the shorter-term distribution into a new range… Now, with the 20-
period lower third standard deviation still above the 50-period mean, the
occurrence of consolidation could simply be allowing both distributions a
moment to 'breathe' and potentially store energy for another move
higher…
The aforementioned is just a quick example of the great power
measuring standard deviations (and the movement of distributions) within
markets… You will soon see that we can also identify when trending is
about to begin, when 'true trending' is in effect and also when trending has
ceased and consolidation is about to commence.
Using concepts of descriptive and inferential statistics, and specifically
standard deviations, we can time our entries to capitalize on volatility
induced breakouts and breakdowns, taking positions when probability of
order flow is truly in our favor.
Moreover, we will also know when the probability of continued
trending has ceased, thus telling us to close our directional positions and
switch gears to lateral trading strategies…
It's all probability and volatility, seen through the expansion and
compression of standard deviations and distributions on our charts…

Mark Whistler • Volatility Illuminated • Page 223 of 363

 The Expansion and
Compression of Subset
Distributions

Jumping right in, Figure 8.12 (below) shows the EUR/USD on a 4-hour
chart… We are again looking at a 50-SMA, with our volatility bands set at
1.2-standard deviations. We've also included a 20-SMA with volatility
bands set at 3.2-standard deviations.
Within the longer-term distribution (the 50-period), we are using
utilizing the 1st-standard deviation to derive the smallest portion of
probability (in terms of descriptive statistics), that would infer potential
follow through of price away from the mean (divergence).
We know there is a 68.4% probability that all of the data should rest
within 1-standard deviation of the mean.
It's also important to note that when measuring 1-standard deviation
from the mean, the occurrence of price moving away from the mean,
through the 1st-standard deviation would line up with 50-period CCI
traveling above +100, or below -100. Again, while the rest of the retail
herd is thinking the event is showing the currency as 'overbought' or
'oversold', because you are more educated and much more savvy now, you
will know that really, the instance just means the distribution is 'on the
move.'

Mark Whistler • Volatility Illuminated • Page 224 of 363

 Don't you just feel bad for all those other traders attempting to
navigate markets with flawed information.
They've been set up for failure, unlike you…
What the above is telling us is when a currency, stock, or other trading
instrument moves above, or below a longer-term 1st-standard deviation,
the instance is NOT screaming overbought, or oversold, rather, the
instance may instead be saying three things:

1. A fundamental event or coincidental news occurrence has prompted

traders to take action, and is creating a move away from the mean.
In essence, there is a reason the bricks (prices) are sliding to one side
of the teeter-totter.
2. If the move is real (not just a 'quick pop' anomaly), the short-term
distribution should 'confirm' the fundamental mindset shift, by
sliding over the mean of the longer-term distribution and then hold
reasonable ground during the initial pullback(s), after the breakout.
3. Short term volatility (measured through standard deviation) will
lead price, an inherent luxury of squaring of the exponent in the
standard deviation formula, when electronically applied to price
action on charts. (I will explain this in greater detail in just a
moment.)

Mark Whistler • Volatility Illuminated • Page 225 of 363

 Figure 8.12

If short-term volatility, as denoted by the 20-SMA 3rd-standard

deviation spikes above long-term volatility, as denoted by the 50-SMA 1st-
standard deviation, the breakout is "confirmed."
Why?
What we are seeing is an instance of short-term volatility leading
price…
Please allow me a moment to pause and explain a very, very important
concept…
If we were simply measuring total distribution mass through
probability (standard deviations), conceptually, we're talking about the
total 'wingspan' of the distribution…or in other words, how 'wide' the
distribution is…

Mark Whistler • Volatility Illuminated • Page 226 of 363

 If all things were equal, meaning normal and calm in markets…and we
were measuring 50-periods of data and 20-periods of data…and we were
measuring total 'width' (mass) of both distributions…and we were doing
so by mapping the 3rd-standard deviations of each, would the 20-period
3rd-standard deviations be inside, or outside of the 3rd-standard
deviations, of the 50-period distribution?
Think about it for a moment…
If all things were equal, meaning prices were in a 'normal state', like not
trending, just calmly traveling sideways, would the total mass (width) of
the 20-period distribution be greater, or lesser than that of the 50-period
distribution?
Clearly, the 20-period mass would be lesser (narrower) than the 50-
period distribution.
Why?
We're simply measuring less data. In short, there is greater probability
of higher and lower prices in 50-periods of data, than 20-periods of data,
when 'all things are equal', or prices are in a 'normal state'.

However, when volatility increases, because we're measuring less data

in the 20-period distribution, the distribution mass would expand quicker
than the 50-period distribution.
The rule holds true when measuring 50-periods at 2.2-standard
deviations and 20-periods at 3.2 standard deviations as well, though there
is slightly more room for trader error.

Mark Whistler • Volatility Illuminated • Page 227 of 363

 Figure 8.13

Really though, what we're talking about is the empirical state where
short-term distribution width will always expand quicker than longer-
term distribution width, based on the fact that the shorter-term
distribution has less mass overall.
Remember our previous discussion of Newtonian Motion and the
equation of force? Force = Mass * Acceleration. The lesser the mass, the
greater the possibility of acceleration and thus, more force to move our
distributions. As the Figure 8.13 shows, when short-term volatility spiked
outside of long-term volatility, a significant downside move in the
GBP/USD occurred on the hourly chart.

Mark Whistler • Volatility Illuminated • Page 228 of 363

 Figure 8.14 - Repeated

There is even more to the story here though…

Back on our original chart of the EUR/USD (Figure 8.14), readers will
notice when the EUR/USD touched the topside 3rd-standard deviation of
the 20-SMA, the pair quickly fell back to the 50-SMA mean, before
resuming the ascending trend.
The longer the period measured, the greater the probability prices will
fail at the 3rd-standard deviation. What's more, in shorter-term periods,
prices tagging the 3rd-standard deviation denotes three events occurring:

1. Short-term volatility has accelerated to a point where prices are

tagging statistical 'outlier' variables.
2. Trending will likely ensue.

Mark Whistler • Volatility Illuminated • Page 229 of 363

 3. Before trending ensues, a pullback to the mean, or 1st standard
deviation is highly probable.

See, we know statistically, there is a 99.7% probability that all of the

data will sit within 3-standard deviations of the mean. Thus, on a short-
term basis, if we have bought a currency pair in a bull-trend and the pair
strikes the shorter-term 3rd standard deviation (on the topside volatility
band), we may want to consider taking profits.
It is important to note that price touching the 3rd-standard deviation
does not mean the trend is over, rather, simply that a pullback to the mean
may perhaps, be in the cards… Then, we can attempt to re-buy the pair on
the mean, if we believe the trend is still intact.
Moreover, if price has just hit the third standard deviation and short-
term volatility is collapsing back below long-term volatility, we can rest
assured price is indeed about to consolidate, or reverse. Why? Simply
put, price cannot move up, or down if short-term volatility is compressing.
Because of the squaring of the exponent in the standard deviation formula,
the application of standard deviations to price data creates a 'multiplier
effect' in the lines representing the standard deviations.
What I have just mentioned is the reason volatility bands expand and
contract, providing us with key information regarding the release of
energy within price action and thus, the expansion and compression of
distributions.
It doesn't matter if you're looking at a 5-minute chart or a weekly chart,
if short-term volatility is expanding, prices are trending in the period
measured. Moreover, if short-term volatility is compressing, prices are
consolidating.

Figure 8.15 shows precisely what I'm talking about…

Mark Whistler • Volatility Illuminated • Page 230 of 363

 As you can see, when short-term volatility (measured through the 20-
period 3.2 standard deviation) compresses, in every occurrence, prices
travel laterally until short-term volatility begins expanding again.
Moreover, as you will also notice, both times when short-term topside
volatility attacked long-term volatility and compressed back below, the
occurrences were almost precisely where the EUR/USD stalled on the
upside.
Why?
Again, price simply cannot continue trending if short-term volatility is
compressing. Short-term distribution width (mass) as measured through
the 3.2-standard deviation, otherwise known as topside volatility, must be
traveling upward for bullish action to continue.
Why?
If short-term volatility is compressing, the occurrence means the
distribution is 'compressing' and a distribution must release energy to
move, not vice versa. Short-term distribution width (mass) as measured
through the 3.2 standard deviation, otherwise known as volatility, must be
expanding for directional action to continue.

See, price movement in markets is about order flow, which is really

about the expansion and compression of energy in subset distributions.
Logically, short-term distributions must release energy first, thus
stimulating the same occurrence in longer-term distributions.
You will read more about the 'release of energy' in the following
chapters so if you're having trouble fully comprehending, or believing, this
'energy expansion and compression' thing, don't worry…

Mark Whistler • Volatility Illuminated • Page 231 of 363

Figure 8.15
You will see the exact
same occurrence in
Figure 8.16, with short-
term volatility
expanding outside of
long-term volatility on
the downside, prior to
the EUR/USD
plummeting on the 4-
hour chart.
As short-term volatility
remains outside of
long-term volatility,
trending continues.
Then, just like
clockwork, when
short-term volatility
compresses back below
long-term volatility, the move is over and lateral trading ensues.
One more time, when short-term volatility is outside of long-term
volatility, we will likely want to use trending strategies. Conversely, when
short-term volatility collapses below long-term volatility, we will likely
want to start using short-term term channel trading strategies, while
continually eyeing a possible longer-term "trade with the trend" entry.
If we were able to close a position when short-term volatility collapses
below long-term volatility and then open the position back up when short-
term volatility begins to expand, we are -in essence- putting significant
probability in our favor- to ride a larger wave of market action, otherwise
known as energy expansion, or trending.

Mark Whistler • Volatility Illuminated • Page 232 of 363

 Figure 8.16

Of note, when traders begin to apply all of the aforementioned to their

own charts, there will be instances of short-term volatility expanding (with
price moving), however, just at the time short-term volatility actually
moves outside of longer-term volatility, the price reverses. Why? Because
the longer-term distribution had too much mass to start with.
Please remember: Force = Mass * Acceleration.
It doesn't matter how hard you try… You (the person reading this book
right now) cannot push a dump truck full of lead up a mountain. The
dump truck has too much mass. So how do we measure mass in terms of
trading and price distributions?

Mark Whistler • Volatility Illuminated • Page 233 of 363

 We can measure mass two ways:
1. Visually, you can look at the total width of the longer-term
distribution and gauge (with common sense) whether the
distribution is too wide to begin (or continue) trending, or…
2. You can use the indicator I have developed and supplied with
this book titled: Whistler Active Volatility Energy • Price Mass
(WAVE • PM). I will explain WAVE • PM in Chapter Twelve.
For now, another problem likely persists for traders… How to denote
trending?
In the Figure 8.17, I have inserted a 50-SMA 1.2-STD, a 50-SMA 3.2-
STD, and a 20-period 3.2-STD, while also adding two 3-period SMA's (the
darker two black lines closely tracking price), one measuring highs and
one measuring lows.
Working from left to right in Figure 8.17, we see trending was
confirmed when short-term volatility spiked outside of long-term
volatility, as denoted with the 20-SMA 3.2-STD spiking outside of the 50-
SMA 3.2-STD. What's more, the EUR/USD also fell below the 50-period
1.2-standard deviation, indicating the larger distribution was on the move.
The instance of the EUR/USD falling below the 50-period 1.2-standard
deviation would have shown up on most CCI windows with the 50-period
CCI falling below -100, which clearly did not mean 'oversold', rather, the
occurrence was shouting 'distribution on the move'.
As the chart shows, the downside move stalled when the 20-SMA 3.2-
STD collapsed back below the 50-SMA 3.2-STD.
For those who were thinking there was more downside to come (at
least immediately, anyway), volatility/probability traders knew the move
was over and mean-regression (at the very least) was in effect.
What I've just mentioned was clearly noted not only when short-term
volatility collapsed back below long-term volatility, but also when the 3-
SMA lows crossed back over the 50-SMA 1.2 STD, implying downside
order flow was no longer in effect and shorts would be squeezed.

Mark Whistler • Volatility Illuminated • Page 234 of 363

 Using short-term highs and lows of the 3-SMA (traders who prefer a
little more 'wiggle room' can use 10-period SMA's off highs and lows) we
are able to quickly identify when the highs and lows of the immediate
range fail support and resistance. What's more, because we are measuring
3-periods of data, it will take more than one freak candle of upside, or
downside volatility to truly change our directional bias.
By using the 3-SMA for confirmation, we are able to further isolate
head-fake moves, from true trending.
Figure 8.17
You will notice
that while the
EUR/USD was
channeling, both
the 3-SMA highs
and lows never
moved above, or
below the 50-SMA
1.2-STD. Again
though, the actual
instance of trending
was not confirmed
until short-term
volatility spiked
outside of long-term
volatility.
What's more, as
the chart shows, the
WTS would have moved violently to the right, thus inferring trending to
come, as the short-term (20-period) distribution moved to the right side of
the long-term (50-period) teeter-totter.

Mark Whistler • Volatility Illuminated • Page 235 of 363

 Shown in Figure 8.17, recognizing volatility spikes can yield big moves,
as noted in the almost 300-PIP drop in the EUR/USD.
It's important to note that in the framework of the information here –as
always- common sense is required.
As you may have noticed, in the above chart, short-term volatility did
not constantly stay outside of long-term volatility…
The instances of short-term volatility compressing are marked with
price moving back to the 20-SMA, but did not fully reverse. Every
extended move in markets will see pullbacks as volatility reloads for
another move…

Figure 8.17

Mark Whistler • Volatility Illuminated • Page 236 of 363

 In the above chart, we also know the EUR/USD never violated
descending resistance of the relative range, until the trend completed itself.
Using the 3-SMA (lows); however, would have absolutely closed the trade
before descending resistance was violated, thus perhaps saving a few PIPs
of profit.
What's more, in one instance (a little over halfway through the move)
the EUR/USD struck the 3rd-standard deviation of the 20-period
distribution. Savvy traders may have inferred it was time to take profits;
thus setting themselves to re-enter -with the trend- at the 20-SMA mean
(which was precisely at descending resistance as well.)
In addition, as previously noted, because the 3-SMA lows never moved
above the 1.2-standard deviation of the 50-period distribution, taking a
long-position any time during the decline would have been foolish.
Regardless, it is important to note that when trending ensues, we
should always attempt to understand why the move is occurring in the
first place, on a fundamental basis. However, with a little common sense
understanding of descriptive and inferential statistics, distributions and
probability, all of the information here should help traders identify
trending, channeling and reversals.
Again though, common sense is king, and if you're not sure why what's
happening is happening…as a rule of thumb, "when in doubt, get out."
We have just covered volatility and probability (in terms of mobile
subset distributions), based on 'price action' alone.
It's important to note what we did not cover is volume/dollar
volatility/probability as well. Price action is reliable when we understand
that it is…
…purely price action.
Looking towards volume/dollar trading action as well, we will now
jump into Chapter Nine, were we will discuss VWAP (Volume Weighted

Mark Whistler • Volatility Illuminated • Page 237 of 363

Average Price), thus adding another variable for aggressive intraday
traders seeking to capitalize on volatility…
After our introduction of VWAP, we will enter into a more detailed
discussion of 'institutional order flow' and then tie everything together
through Whistle Active Energy Volatility • Price Mass (WAVE • PM).

Mark Whistler • Volatility Illuminated • Page 238 of 363

 CHAPTER NINE
Volume Weighted Average
Price (VWAP)

In currency trading, many retail traders can lose fortunes, before ever
even hearing about VWAP. It's an odd occurrence really, that so many self
proclaimed 'high-tech' at home traders navigate markets daily without
even having the faintest clue about institutional trading performance
benchmarks, like the one I have just mentioned. Clearly, the simple fact
that so many retail traders have no clue about VWAP simply proves
success continues to rest within the hands of those controlling the bulk of
order flow.
VWAP (Volume Weighted Average Price) is really a moving average of
price, weighted for the amount of shares that are traded over the duration
of the period measured.
For institutional traders running order flow, VWAP is used as a major
benchmark of performance for those seeking passivity in order execution.
In other words, trading to VWAP is a type of dollar cost averaging during
the session, as measured by the volume/dollar average of the session, or
whatever period measured.

Mark Whistler • Volatility Illuminated • Page 239 of 363

 VWAP is calculated using the following formula:

Where:
PVWAP = Volume Weighted Average Price
Pj = price of trade j
Qj = quantity of trade j
j = each individual trade that takes place over the defined period,
excluding cross trades and basket cross trades.

In terms of execution, there are two type methods, which most

institutions use:
1. Guaranteed Execution
2. Target Execution
Guaranteed Execution is where a broker explicitly 'guarantees VWAP, or
better' for clients, meaning the broker guarantees the VWAP price, or
better, or usually, the trade is free. What this means is that in a rapidly
ascending market, the broker's computer(s) will likely buy boldly on dips,
to ensure the 'guarantee' of VWAP, or better holds, as prices rise into the
day.
Target Execution is usually a less expensive commission process for
clients, as unlike guaranteed execution, target leaves more discretion to
traders, while also requiring more price dispersion…

Mark Whistler • Volatility Illuminated • Page 240 of 363

 What this means is there is usually greater 'spread' in total execution
price, in relation to VWAP.
Let's break VWAP down to more simple terms… VWAP is the total
dollar average of the shares traded in a day, or in a given period…
VWAP differs from a basic moving average in that the calculation takes
into account the dollar volume of the instrument (measured through
volume) traded in any given time period. Conversely, moving averages
simply calculate the 'average price' over a given time period, without
recognition of volume.

Don't worry if the aforementioned sounds a little foreign, or confusing

right now; it may take a little while for the concept to sink in. (Especially
why keeping an eye on VWAP is so important!)
In reality, VWAP is a definitely a 'paradigm shift' for most retail
traders…
Why?
Retail traders seek to make money when a stock, currency,
commodities, or futures price moves up or down. In essence, the retail
trader has been conditioned to believe his sole 'opinion' about price action
in markets, should be to know whether prices are moving up, or down.
Retail traders believe the better the trader you are, the more you will know
whether prices are about to ascend, or descend. Little does the retail trader
know, intraday action is more about risk and fill, over the up, or down
'opinion' of prices.
For the institutional traders attempting to 'work orderflow' he or she
knows trading is really about risk, in relation to benchmark performance.
At the end of the day, institutional traders simply seek to achieve the
best possible prices possible for their clients.

Mark Whistler • Volatility Illuminated • Page 241 of 363

 In terms of institutional trading, large orders are broken down into
smaller orders, which are then 'worked' (via trader, or computer, or both)
over a given period.
The phenomenon of breaking large orders into small orders and then
working the little orders over a period of time is called 'iceberging' and is
intended to lower the overall cost of the transaction, while keeping the
large order out of the sight of other market participants.
Please take a moment to observe the below table… In column two
'Price' we can see over a given period (it could be 1-minute, 5-minutes, 1-
day, whatever…) there were two transactions: One buy at $24.50 and one
sell at $24.00.

Figure 9.2
Volume Price Total
Bought 1000000 $24.50 24500000
Sold 500000 $24.00 12000000
Volume 1500000 $48.50 36500000
Moving Avg $24.25 $24.33  VWAP
Bought 300000 $23.30 6990000
Sold 200000 $22.50 4500000
Volume 500000 $45.80 11490000
2000000 $94.30 47990000
Moving Avg $22.90 $24.00  VWAP

If we were using a simple moving average, the actual line on the chart
would be marked at $24.25, which is the average of the two prices.
However, if we were to incorporate the volume traded in the same
period, the moving average line would instead be marked at $24.33.
Why?

Mark Whistler • Volatility Illuminated • Page 242 of 363

 As the below image shows, when we calculate VWAP, we are actually
multiplying volume by price, summing the calculation and then dividing
by the total volume in the given period…
For our price of $24.33, the math would be:
[(1,000,000 * $24.50) + (500,000 * $24.00)] = 24,500,00
Then we would divide 24,500,000 by 15,000,000 (the total volume
traded in the period) to get the VWAP of $24.33.
What's so important to understand is that while a simple moving
average provides the average (middle, mean, or mid) price of the period
measured, VWAP actually takes into account the fact that more shares
were traded at the higher price, versus the lower, thus giving us a more
accurate indication of whether there are more buyers, or sellers in any
given period.

Figure 9.3

Mark Whistler • Volatility Illuminated • Page 243 of 363

 Do you see the implications here?
A simple moving average is nothing more than present a line with a
50/50 guess of whether buyers or sellers were present. However, VWAP
actually provides greater insight into the actual buying and selling that
occurred in any given period.
Can you see why price action technical analysis can often set retail
traders up for failure from the start?
The aforementioned does not mean we can't use moving averages, or
price action only technicals, we simply must understand moving averages
and other technicals do not take volume into account.
We must understand that price action is a derivative of volume and
that without volume (the actual instance of a transaction), price cannot
exist.
Again, price action moving averages are not totally misleading… After
all, we are measuring the average of prices (and nothing more), over a
given period.
Used in conjunction with VWAP (in terms of volatility/probability, as
mentioned in the previous chapter), moving averages are a great identifier
of 'average distribution' price movement.
In terms of VWAP, here's what readers must understand…
What we're talking about is a benchmark of price, which institutional
traders are measured by, in terms of commission structure and
performance.
If you're an institutional trader and you receive a buy order for $40
billion EUR/USD, your client needs some sort of way to measure whether
you've done a good job of filling his order in relation to the prices of the
day… Thus, if you receive a $40 billion order for whatever, chance are,
you're not going to be able to fill the whole order in one shot, without
creating a stampede. Thus, you need to fill the order slowly over time,
whereby your client will then measure your overall performance with
Mark Whistler • Volatility Illuminated • Page 244 of 363
some sort of benchmark of average prices throughout the session.
Benchmarks include VWAP, TWAP (Time Weighted Average Price),
LHOC (Low, High, Open, Close [average]), just to name a few.
The bottom line is, if you are an institutional trader and you are able to
consistently fill your clients orders at prices better than VWAP (or other
benchmarks), everyone will likely be very happy. What's more, in some
cases, traders are even paid bonuses for achieving better fills over time.
While there are many benchmarks institutional traders are gauged by, the
most widely coveted is VWAP…
With this in mind, please look at the following two charts, Figures 9.4
and 9.5.
In Figure 9.4, we are seeing 14-period, 21-period and a 50-period
regular Simple Moving Averages. What I would like you to immediately
take notice of is the fact that if we were looking at shorter-term moving
averages, like the 14-period and the 21-period, the (on the 5-minute chart)
the EUR/USD pierced the moving averages three times, once in the
beginning of the rally and then twice towards the end. For the at home
trader, this price action likely just looks like "volatility."

Mark Whistler • Volatility Illuminated • Page 245 of 363

Figure 9.4

Mark Whistler • Volatility Illuminated • Page 246 of 363

 Figure 9.5

Mark Whistler • Volatility Illuminated • Page 247 of 363

 Now, if we look at the Figure 9.5, however, we see that the EUR/USD
attacked 5,000-tick VWAP twice, which it stalled at almost precisely…
In Figure 9.4, the 50-period SMA is the only technical moving average
that comes close, but still, the EUR/USD did not actually 'touch' the
indicator.
So what's happening here?
Foremost, we must remember that price action –only- moving averages
are nothing more than technical indicators of 'average price'.
It's important that you understand this concept. Moving averages, at
least in-terms of providing accurate trading signals, are nothing more than
indicators that only hold if enough people act on the same information at
the same time.
VWAP is similar, except that the 'people' acting on the information are
institutional traders, who control the bulk of the order flow. Do you see
how important this paradigm shift for retail traders is?
If you want to know where order flow is, than it's important to watch
an indicator that shows what and where institutional traders are looking
at… Not just a simple technical tool that is only relevant from time to
time, most often by luck and luck alone…
If we want to use moving averages, than we need to understand that
they should be used as, 'benchmarks for volatility distributions' and not fancy
technical analysis trading signals, with no real explanation…

Mark Whistler • Volatility Illuminated • Page 248 of 363

 Figure 9.6

When distributions move above and below one another (like a 14-
period moving average crossing under a 21-period moving average, for
example) we should be thinking: On a price action basis alone, the shorter-
term volatility distribution just moved under the longer-term distribution…
What we should not be thinking is: The red line crossed under the blue line
and that's a definite sell signal.

Mark Whistler • Volatility Illuminated • Page 249 of 363

 Now, if we take a look at the next chart, you will notice I have drawn
two more lines, a 34-period Simple Moving Average and 10,000 tick
VWAP.
It is important to note that I added the 34-period only after 'trying' to
make several moving averages fit VWAP.
In the case of the 15-minute chart, the 34-period was the closest
benchmark moving
average I could find.
Unlike the 34-
SMA, the 10,000 tick
VWAP is a constant
value that traders can
use (at least for the
time
being…remembering
that everything
eventually changes
within markets) when
attempting to wiggle
into the mindset of
institutional traders.
What is so
important to
understand here
(reiterated again) is
the 34-period is
nothing more than a
technical indicator of
average distribution
price action.
Figure 9.7

Mark Whistler • Volatility Illuminated • Page 250 of 363

 However, VWAP is an actual institutional benchmark that many of
those who are working BIG orders, are likely watching to time their trades.
If you had $40 billion in orders to work, would you buy as close to
VWAP as possible, or way above it, like many at-home technical breakout
traders?
Of course you would buy into VWAP, knowing that if the EUR/USD
were to then begin rallying again, your buy would be under VWAP, as
VWAP continued to ascend.
Again, In the shoes of the institutional trader, he would want to buy a
pullback into VWAP, if the trend looked like it was going to stay intact,
knowing that another leg up would move VWAP higher, and thus,
provide the trader a better fill than VWAP for the day.
If the EUR/USD were to break below VWAP, the trader would likely
sell inventory, knowing he would likely be able to buy lower, as selling
tapered later on.
The 34-period held as a buy signal (with the trend) in the first leg of the
up move, but VWAP was more accurate in the final instance of 'test' before
the last wave up.
Why?
Foremost, because if a trend is truly to stay intact, institutional traders will
buy into VWAP, attempting to time their trades as close to the benchmark as
possible. Institutional traders don't look at other technicals like MACD, or goofy
awkward period moving averages.
Unfortunately, because the at-home trader hardly has any real
information, and was likely inferring a sell signal when his 14-period and
21-period moving averages were breached, or other momentum indicators
were showing signs of being overbought, the retail trader likely got short,
while the institutional trader was buying exactly into VWAP…

Mark Whistler • Volatility Illuminated • Page 251 of 363

 As the Figure 9.7 shows, three times during the uptrend, retail traders
were given sell signals by stochastics (using the common preset variables of
5,3,3).
Do you get it?
Do you see it? Figure 9.8

Please tell me
you see how
conventional
indicators
completely set
retail traders up
for failure!
I'm not joking
about this stuff…
Most of the
technical
indicators retail
traders look at
are nothing more
than pretty lines
on a chart…
Retail traders
who were
watching the 15-
minute chart and
stochastics
(Figure 9.7),
were likely
scratching their heads saying 'geez Forex is volatile'; however, the savvy
trader who understands VWAP and volatility/probability knows there's
more to the picture…

Mark Whistler • Volatility Illuminated • Page 252 of 363

 Savvy traders know trading profitably is more about the minds of
those working institutional order flow than a few dim-witted lines on a
chart.
This is Volatility Illuminated .
Okay…I hope you're asking if there's a downside to VWAP?
If you are, you get a gold star.
Just like any indicator, VWAP will not illuminate everything that is
happening within the market, all the time.
When a currency crosses over VWAP, the occurrence does NOT always
mean a reversal is pending…
In fact, Forex markets sometimes move all over VWAP, providing
virtually no insight into the institutional mindset.
If you look at Figure 9.8, you will notice that when the ascending trend
ended (or at least, slowed), the EUR/USD traded all over the place (above
and below) both VWAP and the 34-period moving average. The at- home
trader was likely taking some serious licks during this time… And the
institutional trader may have been too.
The aforementioned is why I am coming forward with WVAV and
WAVE • PM which will help both institutional and retail traders solve
some of the problems mentioned above.
(Please note that the WVAV strategy was built for institutional trading. In
fact, WVAV could very well even save institutional traders working billions in
order flow - piles of commission cash - by knowing when lateral markets are about
to ensue, and when trending is truly in effect.)
As we move forward into our discussion on WVAV, we need to
remember:
VWAP is a glimpse into what the institutional trader is thinking in
identifiable situations of trending.
VWAP by itself isn't enough.

Mark Whistler • Volatility Illuminated • Page 253 of 363

 However, when we add VWAP together with volatility bands (WVAV)
and WAVE • PM (price distribution mass) we will have an edge many
traders never do.
The true gem behind WVAV is the indicator is almost a sort of artificial
intelligence in and of itself, as the methodology provides guidance into
when markets are about to (and will continue to) move sideways, and
when volatility is foreshadowing and/or sustained trending.
In effect, with what I'm about to show, traders will know when to use
lateral 'channel trading' techniques and when to buy pullbacks, with the
trend.

Mark Whistler • Volatility Illuminated • Page 254 of 363

 CHAPTER TEN
- WVAV -
WHISTLER VOLUME
ADJUSTED VOLATILITY

We're finally here… The explanation of WVAV. Before I jump in, I

would like to provide readers with a little background of some of the
events over the past year, which helped bring WVAV to life.
In the fall of 2008, I traveled all the way to Dalian, China to speak at the
amazing Global Chinese Financial Forum, hosted by ChinaWorldNet.com.
I then journeyed to Guangzhou, China (75 miles outside of Hong Kong)
to work with traders and programmers from ECTrader.net, to breathe life
into the concepts at hand.
I would also like to mention the WVAV (as you are about to read about
here) is not a 'cut and dry red line crosses blue line signal system.'

Mark Whistler • Volatility Illuminated • Page 255 of 363

 Instead, WVAV is part of a larger methodology, helping to derive
trending and consolidation, while also providing some insight into
potential institutional mindset. Furthermore, using the information in the
following pages will require some common sense. If you're looking for a
'red line crosses blue line' signal, this is not it. However, with some
rational analysis of the situation at hand, I think you will find WVAV an
extremely powerful tool like no other -readily available- without spending
thousands of dollars.
We will now begin our discussion of what WVAV is and how the
indicator assists in understanding order flow and institutional
motivations, and why such is both important and valid.

What is WVAV?

WVAV is really three pieces combined to sum the whole. WVAV

consists of:
 Two indicators of VWAP in the same period, but measuring different
data.
 Two sets of VWAP volatility bands.
 Two normalized measurements of price distribution 'energy',
otherwise known as 'mass', also known as WAVE • PM.

In the end, over ten years of research went into the 'theoretical makeup'
behind WVAV and WAVE • PM.

Mark Whistler • Volatility Illuminated • Page 256 of 363

 Really, the philosophy and theory behind WVAV and WAVE • PM are
why the indicators are novel within today's 'light speed information'
markets.
In essence, we are approaching markets from a stance of physics, while
also incorporating volatility and probability within the movement of
distributions…

Measuring Mass and Energy

There are a few simple guidelines of theory readers must understand

about WVAV and WAVE • PM …
Foremost, we are talking about the movement of mass and the energy
required to move whatever mass we are measuring. Understanding the
concepts here, we will need to put effort into reshaping the way we think
about price movements in markets…
Movements in markets are not purely about directional price action…
Movement in markets is about the expansion and compression of
energy.
As an analogy, please think about markets as a big rubber ball… When
all things are neutral, the ball is round and centered… However, because
money is involved, markets (currencies, equities, options, commodities,
futures, whatever…) NEVER stay completely neutral, or round.
Why?

Mark Whistler • Volatility Illuminated • Page 257 of 363

 Again, because money is involved.
Individual speculators, corporations, funds, Governments, brokerages
and a variety of other players are constantly trying to make money on
movements within markets...
Figure 10.1
Movement is based on the
perceived value of the financial
instrument today and the expected
value of tomorrow.
Thus, because the news of today is
always shadowed by the unknown
of tomorrow, participants are
constantly buying and selling
positions in an effort to profit from
the expected movement of any
moment beyond now.
The aforementioned is partially
why regular technical indicators
fail… Typical technicals only present data that has already occurred,
without guidance into tomorrow, other than some type of expected -
reoccurring- similarity to what happened yesterday.
However, tomorrow is never exactly like yesterday or even today,
which is why technical indicators constantly seem to provide false signals,
with every new day that passes.
What's more, it's important to understand one more very important
concept…
Really, in terms of volume, we have again arrived at the chicken before
the egg, or the egg before the chicken argument.
Does price action appear before volume, or does volume appear before
price action?
The answer is volume precedes price.

Mark Whistler • Volatility Illuminated • Page 258 of 363

 One must first effect a transaction (meaning a certain dollar amount
must not only be tendered to buy, or sell, but accepted, as well), before a
price can print on a chart.
What this means is all technical analysis is a derivative of price action,
which is a derivative of volume.
Thus, we can use price action in determining volatility and probability
(and/or other indictors) only so long as we understand the reality of the
situation unfolding.
When we use technicals based off price action alone, without direct
reference to volume (dollars put into action) in markets, we are missing the
'origination' of the larger picture: volume.
Do we drive without a gas gauge? No way.
We have to know how much fuel is in the tank, before embarking on a
trip. If we have no idea what's going into the engine (or how much is in
the tank at all); how far will we make it?
No very far at all.
Volume buying, or selling at any given level is our gas gauge. If price is
moving up and hardly any buying volume occurs, the gas going into the
engine is weak, and will likely cause a sputtering breakdown.
What's more, without a 'gauge' of the 'effectiveness' of the gas and/or a
gauge of how much gas is in the tank, we are trading two-fold blind.
Thus, technicals (that do not take volume into account) are a
measurement of output and not the 'fuel' going into the engine. Anyone
can look back and measure total miles traveled in a trip, but it takes a more
savvy driver to calculate how many miles are feasible, based on the gas in
the tank, and the quality and impact of, in terms of miles per gallon, as we
look towards a trip ahead.

Mark Whistler • Volatility Illuminated • Page 259 of 363

 Traders who solely use 'price action derivative indicators' are attempting
to use historical trips, as a measurement of future possible miles. The
problem is that the upcoming trip very likely has much different terrain,
than the previous drive.
Here's what I mean:
Did you know that driving at an elevation above 10,000 feet can cause
your car's engine to have 34% less power output, "due to a combination of
lowered oxygen levels, and a significant reduction in atmospheric pressure."49
Metaphorically, when a stock, currency, or other financial instrument
rallies heavily at 'high altitude', the event likely infers traders 'stepping on
the gas', given the emotion and intensity of the situation. However, just
like automobiles at high altitude, more gas is required to compensate for
the loss of power…
Traders 'step on it' causing a fierce rally (like the steep 5th wave
upward in Elliot Theory.) However, the higher the altitude, the greater the
likelihood of the engine breaking down and possibly running out of gas
too, based on the lead-foot overcompensation taking place.
While the aforementioned might seem like overkill, the point is we
must know what's going into the engine and how the fuel is not only
affecting, but interacting with the motor, if we expect to truly see high-
performance.
Utilizing volume within trading is 'foresight', using 'price action'
technicals alone, is hindsight.
Back to the round ball explanation…
The ball is basically a distribution of market action showing trending,
or consolidation. What's more, because information is moving at the speed
of light today, markets hardly ever stand still.
Thus, we need to understand the theory behind 'compression'
(consolidation) and 'expansion' (trending) of the energy moving
distributions within markets.

Mark Whistler • Volatility Illuminated • Page 260 of 363

 Figure 10.2
Now, please look at Figure 10.2.
What's happening to our ball?
You guessed it… The 'ball'
compressed! Well, maybe you
didn't guess it, I really don't
know.
The point is that when
pressure is applied to the ball, we
see 'compression', or lateral
trading.
Also, please note that the
compression is being caused by 'Big Fund Bob' sitting on the market (please
don't laugh at my artwork again!)
Here's where some understanding of volume really comes into play, for
the retail trader. See, most at-home traders believe that volume is required
for a 'surge', but really…this is not always the case.
Often, the volume is really from 'Big Fund Bob' sitting on the market,
because he can't make up his mind. When markets travel sideways, we are
really seeing big players slugging out order flow, without guidance to
future direction. In essence, the large players are lacking insight, just like
the little guy. During this time of 'lateral trading', 'consolidation', or
'storing of energy', markets travel sideways, while participants struggle to
find information to motivate a larger move up, or down. I know this is
contrary to what most retail traders believe, thus, please take a moment to
look over the below chart…
In following hourly chart of the EUR/USD (Figure 10.3), readers will
notice the currency pair witnessed a fierce upward rally on March 18th
and 19th of 2009.
The rally really only lasted a little over a day...

Mark Whistler • Volatility Illuminated • Page 261 of 363

 Figure 10.3

However, the following seven days (the 26th and 27th are not visible)
witnessed lateral trading.
What's more, during the 20th to the 27th, the EUR/USD experienced
seven (three visible) volume surges before taking out support in the 1.3418
area.
See, what we have to understand is volume isn't always the sole
motivator of rallies and/or breakdowns; rather 'volume' can be Big Fund
Bob sitting on a currency, stock (or whatever), both ways.

Mark Whistler • Volatility Illuminated • Page 262 of 363

 Big Fund Bob isn't sure what the outcome is going to be either, and so a
sort of trading tug-of-war takes place, while bigger players 'jockey for
position.'
What's more, in sideways markets, volatility and hedge players step in
to take advantage of the situation too.
Figure 10.4
Fact is, energy is stored in markets
(seen through volume and
compression of price distributions)
when Big Fund Bob is sitting on the
ball, meaning the larger players are
stifling directional movement,
fueling lateral trading action.
Without clear news, or
information that presents greater
and more transparent expectations
of tomorrow, than today; markets
will travel sideways, thus 'storing
energy'.
So what happens when Big Fund Bob 'gets off' the bid and/or ask? An
explosion of movement occurs…
In the case of the EUR/USD, the lateral trading action was partially
motivated from Big Fund Bob keeping the pair from traveling higher.
What's more, when the EUR/USD took out support, other funds,
institutions and retail traders were prompted to dump positions, hence the
extended 'pullback.'

Mark Whistler • Volatility Illuminated • Page 263 of 363

 Figure 10.5

Another point to quickly mention, as Figure 10.5 shows, the pullback

pierced the 61.8% Retracement slightly, before attempting to resume an
ascending move… Retail traders who took long positions right on the key
Retracement were likely stopped out in the 'volatility pop', only to watch
the EUR/USD reverse and move higher later on.
Over the past year, I've been receiving increasing amounts of email
from retail traders complaining of excess volatility and indicator failure…
This example should again serve as proof of the pudding that 'excess
volatility' (in terms of common indicators failing slightly and/or entirely)
is readily present in today's market. Because we now have an entire army
of retail traders who are acting on the same information, at the same time,

Mark Whistler • Volatility Illuminated • Page 264 of 363

with the same pre-set technical indicator inputs, short-term 'quick pop'
volatility is increasing.
When the technicals fail, like a herd of lemmings, the retail traders rush
to cover, or are electronically stopped out, causing an excess 'pop.' Retail
volume is not enough to keep a trend intact, which is why the 'pops'
usually occur at key technical levels and then reverse.
Overall the critical concepts to understand here are:
1. Market movements are about the expansion and compression of
distributions.
2. Volume doesn't always have to persist for a torrid trend to ensue.
Often, heavy volume causes sideways trading, a point many
retail traders are unaware of.
3. The longer an instrument compresses (stores energy) the greater
the likelihood the expansion period will be fierce.
4. Stock technical indicators rely on price action alone and are
devoid of critical dollar/volume data needed to trade
successfully on a short-term basis. We can (and will) use
technical indicators that rely on price action alone, but we must
understand that the indicator relies on price action alone.
5. If we can map the expansion and compression of energy within
markets, we really are measuring the probability of volatility
(measured in total width of distribution) where big money will
step up, or fade.
6. The physics mumbo jumbo I discussed in Chapter Seven is
extremely important as market movements (seen through
volume/dollar/price action, derived from the expectations of
market participants) are about order flow, seen through energy
and mass, not technical analysis.

Mark Whistler • Volatility Illuminated • Page 265 of 363

 Additional NOTE:

Before moving forward, I would like to take a moment to reiterate a few

facts again from Chapter Two - Why Indicators are Failing in the Current
Market.
According to the Bank for International Settlements' Triennial Central
Bank Survey (Foreign exchange and derivatives market activity in 2007),
Bank for International Settlements' Triennial Central Bank Survey (Foreign
exchange and derivatives market activity in 2007), "the median share of
electronic execution is 17% for non-financial customers."50 The point here
is retail traders do not move markets over the long haul.
However, according to the Wall Street Journal, "Volumes on dbFX, the
online retail trading platform from Deutsche Bank, increased 37% in the
first quarter of 2009, from the same period a year earlier."51
More retail traders have entered the game.
What we're talking about is a fresh wave of neo-volatility from a whole
new set of traders (now at the table) who might not really know what they're
doing.
New traders use preloaded technical analysis variables, which as I've
mentioned, increases the 'mass army' of at-home traders doing the same
thing at the same time, on information that really isn't that great in the first
place.
What I'm saying is: expect even more 'quick pop' volatility -directly at
key price action technical levels- in the weeks, months and years to come.
The problem is only going to get worse.

Mark Whistler • Volatility Illuminated • Page 266 of 363

 Mass and Energy through
Standard Deviations

Coming back to our discussion from Chapter Eight, we can measure

energy through volatility, also known as the total width of distributions, a
critical component of mass.
When a distribution is wide (meaning a ton of mass) the more volume
(buying or selling) required to continue the trend (or distribution
expansion.)
The more mass an object has, the more energy required to move it.
We will now move directly into our discussion of Whistler Volume
Adjusted Volatility (WVAV), in terms of volatility/energy. Then, in
Chapter Twelve, we will cover Whistler Active Volatility Energy • Price
Mass (WAVE • PM).
The overall concept, as you're about to see, is fairly simple… Again, the
theoretical underpinning was the difficult part to unearth; the coding (with
ECTrader.net in China) was less of a struggle, once the ball was rolling.
At the core of WVAV, we are using Bollinger Bands (volatility bands) to
measure price trending, and/or consolidation.
By the way, I would like to again reiterate that I believe Bollinger's
application of standard deviations to price action, was perhaps one of the
greatest trading breakthroughs, seen in modern times.

Mark Whistler • Volatility Illuminated • Page 267 of 363

 Figure 10.6

So how does volatility come into play with WVAV and Bollinger Bands
(volatility bands)?
As previously mentioned, volatility bands are a measurement of total
potential distribution wingspan (mass), through the total potential 'width'
the standard deviations are displaying on our charts. As mentioned in
Chapter Eight, when we map a distribution, we seek to measure
probability from the mean, by one, two and three standard deviations.
Figure 10.6 again shows, there is a 68.3% probability that all of the data
will fall within 1-standard deviation of the mean, a 95.4% probability all of
the data will rest within 2-standard deviations and a 99.7% probability all
of the data will be parked within 3-standard deviations of the mean.

Mark Whistler • Volatility Illuminated • Page 268 of 363

 (Please note again that actual Bollinger Band settings need to be 1.2, 2.2, or
3.2 standard deviations and not whole numbers, accounting for data loss in the
conversion of standard deviation formula – into electronic format on charts.)
Again, the brilliance of Bollinger Bands (volatility bands), is simply the
incredible fact that the squaring of the exponent in the standard deviation
formula (when your computer calculates the bands) creates a type of
'multiplier effect', causing the bands to expand and contract with volatility.
When prices consolidate the bands compress and when prices trend, the
bands expand.
While this may sound lowbrow, hold your horses for a moment, before
passing judgment.

What the Multiplier Effect

Means To Us

When we overlay two or more sets of Bollinger Bands, we are actually

seeing two different sets of volatility.
Here's the best part of all…
If I were to ask you whether the total range of the EUR/USD would
theoretically be wider over an entire year, or over one week, what would
your answer be?
One year of course.
Over the duration of an entire year, the EUR/USD would simply have
more time to trade up and down and would likely have a greater total
range than just one week of trading action.
Mark Whistler • Volatility Illuminated • Page 269 of 363
 The above concept implies, when all things are constant and markets
are relatively stable, short-term volatility should rest WITHIN long-term
volatility.
In non-technical language, if you have two sets of volatility bands on a
chart, a 50-period and 14-period, for example, regardless of whether you
are looking at one, two, or three standard deviations, when looking at the
same standard deviation setting for 14-period volatility bands, against the
same standard deviation setting for 50-period volatility bands, the 14-
period standard deviation volatility bands should rest inside of the 50-
period volatility bands. (Again, only if markets are 'normal', or 'stable.')
When volatility picks up though, which of the two bands will spike
first?
The 14-period volatility bands will spike quicker than the 50-period
volatility bands, simply because there's less mass to move.
Do you see what I'm saying?
We're talking about volatility leading mass. The less mass an object
has, the quicker it can move. In terms of regular moving averages, a 14-
period moving average is, or at least should be, much more volatile than a
100-period.
Image this: You're standing in a Field in Kansas watching a herd of
hippos graze in the luscious grass… Suddenly an old truck drives by and
backfires, startling the hippos into a stampede.
Which of the hippos is likely going to be in the front of the pack, as the
group starts moving…
Most likely, the ones that prefer to graze on slim fast grass, over their big
fat hippo-colleagues.

Mark Whistler • Volatility Illuminated • Page 270 of 363

 Anyway, the point is when volatility is about to pick up and prices are
about to move, shorter-term volatility will likely start to bolt first, before
the counterparts with greater mass.

Why Do We Look For

Volatility Spikes?

When short-term VWAP volatility begins to spike outside of long-term

VWAP volatility, we should be on red alert that quick institutional money
is 'on the move.'
The quick money, the guys, or computers, who are sharp, recognize a
move is about to ensue, and are putting their money to work. We can
recognize this occurrence by using volatility bands (Bollinger Bands) in
conjunction with VWAP, to measure volatility with dollar volume, instead
of just price action (though we will use price action in just a moment too.)
Remember our previous discussion about Newton's Second Law of
Motion, where Force = Mass * Acceleration and Einstein's Mass-Energy
Equivalence where E = mc2?
Don't worry about the math, just understand the theory…
For trending to ensue, there must be enough force to push the actual
price distribution to move beyond the present lateral range (support and
resistance).

Mark Whistler • Volatility Illuminated • Page 271 of 363

 If a distribution has compressed, there is less mass to move, right?
Right.
What we can then imply, is when a longer-term distribution has
significantly compressed (meaning mass is low/light) and short-term
volatility spikes outside of long-term volatility, we are seeing acceleration
in action. Moreover, because the longer-term distribution has shed mass
(consolidated) the spike in short-term volatility has greater probability of
moving the longer-term volatility (and mass) with it.
We can restate Newton's formula as:
Mass = Force / Acceleration
Then, in terms of E = mc2, the energy required to keep a distribution in
motion is the mass times the speed of light (in a vacuum), squared.
The above math is not the most important point here… The critical
component is simply in understanding that the greater the spike of short-
term volatility, outside of long-term volatility, the greater the speed, or
'force' of the upcoming potential move, assuming the longer-term
distribution doesn't have too much mass already.
If you're a physicist, you may be thinking I'm confusing terms, however, for
the at home trader who does not have thousands to spend on coding, or technology,
and/or the time, or desire to study quantum physics, the concepts of force,
acceleration, speed and energy are interchangeable for our purposes here.
Simply put, the mass of a distribution cannot move without force.
Moreover, there is greater probability of force, when a distribution has less
mass, over a bulky counterpart.
In one of my conversations with Alvin Yu the CEO of ECTrader.net
while I was in China, I explained the above theory in markets…expecting
questions.
Yu, a market genius and great friend, responded (to paraphrase), "Mark
what you're talking about is power."
I replied, "What?"

Mark Whistler • Volatility Illuminated • Page 272 of 363

 Yu added, "Have you ever heard of Bruce Lee?"
"Of course, everyone in America has," I replied.
Yu suddenly popped his fist towards my face (yes, I flinched). When
my heart stopped palpitating, Yu's arm was extended straight outward,
inches from my nose. Yu asked, "What's wrong with this picture?"
"You're nuts?" I inquired.
"No," Yu said, "How can I hurt you now, with my fist totally extended?"
Alvin was right… Kung Fu and the market go hand in hand (in more
ways than one), as when one's arm is tight to their body, the greater the
potential force that he, or she can strike with. As the punch (arm) grows
more and more extended, the less power retained. There might be
considerable force in during the extension process, but as one's fist moves
away from the body, the reality of the situation is that the hand can only
go so far. The distribution is in the process of extension (expansion) and
there comes a point where a fist can only go so far from one's body.
What the heck does all this mean? Much like Kung Fu, when throwing
a punch, one must eventually retract his or her fist to regain power for
another strike… Furthermore, while skinny people might be able to punch
quicker, most of the time, the larger dudes usually do more damage. What
I'm saying is short-term volatility strikes quicker, but when long-term
volatility is on the move, the blow will likely be greater.
No matter whether the puncher is big or little, skinny or tubby, guy or
gal, eventually the striker must pull back their fist…to reload.
Did I just say 'pullback'?
Yes I did. A pullback is a reload of power. In a moment, I'm going to
show you how to perceive a punch coming before you're upended on the
chin by markets, and how to tell when the striker has lost power and must
reload. I will even show how to distinguish when a counterblow has been
served, causing a reversal of edge.
Again, what we're talking about is mass and force in terms of volatility,
derived from dollar/volume and price action.
Mark Whistler • Volatility Illuminated • Page 273 of 363
 So now, let's put the first part of the methodology into action… WVAV
volatility/energy…

WVAV Volatility/Energy

I've supplied the code for WVAV, WAVE • PM and Two-CCI (making
up Quad CCI in two windows) at the end of the book. I have also supplied
a template file (only on the Website though) for WVAV, as well. To
download the MetaEditor files, please visit:
www.fxVolatility.com/volatility-illuminated-indicator-templates.html
In the following section, we will use WVAV volatility/energy opened
twice on the same chart. By this, I mean we will overlay two sets of
VWAP volatility bands on one chart.

Mark Whistler • Volatility Illuminated • Page 274 of 363

 The settings for the first set of WVAV volatility/energy (in MetaTrader)
are:

WVAV (Energy)
10,000 ticks:
MA_Ticks = 10,000
MA_Shift =0
MA_Start = 500
aa = ********
MidBandVisible = true
Bands Period = 21
Bands Shift =0
Bands Deviation = 3.2
Color = Red
1 = Dark Golden Rod
2 = Black
3 = Black
4 = Black

Mark Whistler • Volatility Illuminated • Page 275 of 363

 Overlaying a second set of WVAV volatility bands, please input the
following parameters:

WVAV (Energy)
5,000 ticks:
MA_Ticks = 5,000
MA_Shift =0
MA_Start = 21
aa = ********
MidBandVisible = false
Bands Period = 10
Bands Shift =0
Bands Deviation = 3.2
Color = Red
1 = Red
2 = Red
3 = Red
4 = Red

After you have the files and template installed in the proper folders,
and are running MetaTrader, please make sure the above settings are
correct, while also checking to be certain the indicator parameters are
selected as well.

Mark Whistler • Volatility Illuminated • Page 276 of 363

Also:

1. In the Visualization tab of the indicator, please make sure:

"All Timeframes" and "Show in the Data Window" are checked
for both VWAP's.

2. In addition, in the Common tab, please make sure the "Allow

DLL Imports" and "Allow External Expert Imports" boxes are
checked for both, as well.

3. Finally, in please right click on your chart and then select

"Properties." When the Chart Properties window comes up,
make sure the "Show volumes" box is checked, using any color
you prefer.
When finished, your chart should look similar to:

Figure 10.7

Mark Whistler • Volatility Illuminated • Page 277 of 363

 Now, let's take a moment to dig into what we're seeing on the chart.
First, I want to once again remind readers that what we are deciphering
with WVAV is how, where and why orderflow may be presenting itself
(through the measurement of volatility, by way of standard deviations)
within currency markets…
What we are not doing is simply looking for brainless 'red line crosses
blue line' signals.

Figure 10.8

Understanding markets requires some human interaction and common

sense. Please apply both liberally.
Figure 10.8 shows the compression and expansion of 5,000-tick VWAP
volatility, and 10,000-tick VWAP volatility, as denoted by the arrows I
have drawn, following the lighter colored inner section of the chart.

Mark Whistler • Volatility Illuminated • Page 278 of 363

 You will immediately notice expansion follows compression, follows
expansion, follows compression, follows expansion, etc…
The chart clearly shows that when short-term VWAP (the more jagged,
and usually inner, of the two volatility bands) is expanding, we see more
directional price action than during moments of compression…

Figure 10.9

Also, please take special note of the three expansion sections I have
marked with an 'E' on the lower portion of the chart and the three frames I
have marked with a 'C' for compression.
As you likely see, expansion does not necessarily always mean
'breakout', rather, expansion means 'price moving' in the range too.
What's more, please also notice that in the first section (on the far left),
5,000-tick VWAP traded outside of 10,000-tick VWAP, kicking off the first
stage of the overall (though mundane) bullish rally.

Mark Whistler • Volatility Illuminated • Page 279 of 363

 What's interesting about this first pane, is we clearly see that when
5,000-tick VWAP compressed back under 10,000-tick VWAP on the
topside, a quick pullback to the 10,000-tick VWAP mean, immediately
ensued.
Can you identify 'compression' and 'expansion' in terms of energy
expended and stored? Please take a look at the following 30-minute chart
of the EUR/USD and attempt to do so…

Figure 10.10

What we see is the greatest directional 'bursts' came (coincidentally,

wink - wink) when 5,000-tick VWAP expanded outside of 10,000-tick
VWAP, after a period of compression.

Mark Whistler • Volatility Illuminated • Page 280 of 363

 Also coincidentally (or not!) in every occurrence where 5000-tick VWAP
volatility compressed back below 10,000-tick VWAP, the EUR/USD
experienced a pullback to the mean.
What's more, just a little over the half-way point on the chart (from left
to right), you will notice that when the EUR/USD fell below the mean of
the 5,000 and 10,000-tick VWAPs (with the 5,000 tick VWAP mean also
briefly dropping underneath the 10,000-tick VWAP mean), the EUR/USD
never actually 'touched' the 3rd Standard Deviation of the 5,000, or 10,000-
tick VWAPs on the downside.
Here's what we know: Through statistics, there is a 99.7% probability
will rest within three standard deviations of the mean… We see the
aforementioned empirically proved on our charts, as virtually all of the
data sits within 3-standard deviations of the mean…for both 5,000 and
10,000-tick VWAP.
However, when the EUR/USD tagged the 3rd-standard deviation of
the 5,000 tick VWAP, the pair pulled back to the mean. We basically know
there will be times when a pair touches the 3rd-standard deviation, but
should not trade outside of it for considerable time. What's more, we also
know the instance of a pair 'touching' the 3rd-standard deviation is usually
followed by a quick pullback to the mean, before the pair travels higher…

We also know when a pair touches the 3rd-standard deviation –once-

above, or below the mean (especially on shorter-term periods), the pair
most often continues in the direction of the 'touch', after pulling back.
Why?
Because if I am touching the 3rd-standard deviation of a short-term
volatility range, I am signaling that price/dollar volume pressure is
experiencing 'quick pop' anomalies on the side of the standard deviation
touched.
The decline in the EUR/USD under both means – and the lack of the
pair's ability to 'touch' the 3rd standard deviation on the downside –

Mark Whistler • Volatility Illuminated • Page 281 of 363

signals there just isn't enough volume/dollar pressure to push the pair to a
point where it 'touches' a 'distribution outlier', i.e. the 3rd-standard
deviation.
What this means to us is that if a pair fails the mean moving downward,
but then is not able to 'touch' the 3rd-standard deviation on the lower
side…and then crosses back above the mean in the previous direction,
volume/dollars flowing into the currency pair at that particular moment,
are clearly bullish.
In the case of the EUR/USD (shown again in Figure 10.11), when the
pair failed the mean, there was not enough volume/dollar drive to push
the pair into the lower volatility band, and thus, indicated a bullish bias.

Figure 10.11 - Repeated

Mark Whistler • Volatility Illuminated • Page 282 of 363

 Nothing in any market will ever travel straight up, or down, so we
HAVE to expect pullbacks, while also actively seeking to understand why
and how they occur.
Figure 10.11 also shows when the 5000-tick VWAP was trading above
10,000-tick VWAP, the instance was telling us short-term dollar/volume
was indicating buying momentum, and vice versa for the 5,000-tick VWAP
trading below the 10,000-tick VWAP.
Some of the best possible trading opportunities come when 5,000-tick
VWAP is trading above 10,000-tick VWAP and the 3.2-STD volatility
bands have compressed, meaning short-term volatility has contracted
underneath long-term volatility...
Then, when the 3.2-STD 5,000-tick volatility bands expand outside of
10,000-tick 3.2-STD volatility, we know we are precisely in the occurrence
of short-term volatility expansion, whereby price action should follow.
In short, institutional order flow is buying, at least in the near-term.
The opposite would be the same for occurrences where 5000-tick VWAP
has fallen below 10,000-tick VWAP.
Overall, what we’re looking for are high probability instances of
institutional order flow showing signs of follow-through, while attempting
to eliminate occurrences of taking positions when there is no hope of
trending, as seen through short-term volatility compressing.
What I'm saying is when short-term volatility is moving inward, prices
simply cannot trend.

Thus, when we see 5,000-tick VWAP volatility fall back beneath 10,000-
tick VWAP volatility, we should be ready for consolidation and/or a
potential reversal.
By using WVAV (mapping distribution width/mass outliers), we are
able to keep a close eye on volatility expansion and compression, thus
taking positions during high probability moments of trending, while also
staying out of markets during moments of consolidation. By doing so, we

Mark Whistler • Volatility Illuminated • Page 283 of 363

are stepping into the shoes of institutional momentum and letting go of the
'old technical indicators' (like stochastics) that really don't work on a short-
term basis (consistently) anyway.
With everything that we have just covered, we will now enter into a
discussion about what institutional trading is really about, and the theory
behind sell side order flow…
Retail traders hardly ever take time to consider the true reality behind
what order flow is and why it occurs in the first place.

Mark Whistler • Volatility Illuminated • Page 284 of 363

 CHAPTER ELEVEN
The Philosophy of
Orderflow and Markets

I hope the picture surrounding volatility/probability and the mass of

distributions is becoming clear… Just in case there are still a few moments
of misunderstanding, let's take a moment to go over what's happening.
To start, by watching the compression and expansion of volatility, in
relation to intraday trading, we are seeing when and where order flow is
picking up and starting to taper. What we want to look for (on 1-minute,
5-minute, 15-minute and 30-minute charts) are instances of 'energy
compression' followed by an attack of the 10,000-tick 3.2-STD by the 3.2-
STD 5,000-tick standard deviation.
In terms of volatility/probability, we are really seeing is an instance of
distribution 'expansion', or a 'punch of force' to get price moving.
We can take positions on a quick pullback of the first attack of the 5,000
-tick VWAP, placing a stop about 20 to 40-PIPs below VWAP. We can then
walk our stops up (or down in the opposite case) with higher lows (or
lower highs for a descending trend) two bars behind, or a close opposite
the 5,000-tick VWAP, or a compression reversal in 5,000-tick 3.2 STD
VWAP back under the 10,000-tick 3.2 STD VWAP.

Mark Whistler • Volatility Illuminated • Page 285 of 363

 The longer we hold a trade the more willing we should be to give it up
if (and when) a compression reversal of 5,000-tick VWAP volatility
(reverting) slipping back inside 10,000-tick VWAP volatility occurs.
When the first pullback ensues, if the volatility expansion has truly
triggered institutional buying or selling, 5,000-tick VWAP will generally
hold the first test. In addition, we should constantly be looking for head
fakes, should NO significant volatility expansion occur.
Moreover, when we see a tag of 5,000-tick VWAP, without volatility
expansion (meaning there is no energy behind the move), we can think
about potentially taking a contrarian position, looking for a mean
reversion trade within the channel, or envelope.
However, if the mean reversion position is against a strong trend, it's
probably a good idea to stay on the sidelines.
Also, if I am in a winning position and 5,000-tick VWAP compresses
back under 10,000-tick VWAP, though I believe there is still reason
(fundamentally) to hold the trade, I will seek a close on the opposite side
of 10,000-tick VWAP before exiting.
My assumption here is if the move is real, the institutional guys will
begin showing up at 10,000-tick VWAP, so as to not miss a 'performance
enhancing' fill.
The bottom line here is VWAP volatility/energy expansion denotes
high probability of trending to follow, while VWAP volatility/energy
compression denotes high probability of consolidation (energy reloading -
otherwise known as lateral trading) about to ensue.
There's more to the picture though… As I watch VWAP volatility
expand and contract, I'm continually asking myself, 'if I had to work an order
for $40 billion right here, would I take the position now, or would I wait?'
To reiterate, WVAV is NOT a 'red line crosses blue line methodology',
what WVAV is showing, however, is some insight into large order flow
through dollar volumes moving in and out of markets.

Mark Whistler • Volatility Illuminated • Page 286 of 363

 When WVAV volatility/energy is compressing, the instance is
indicating a possible reload of energy, also signifying larger players are
taking a break to evaluate the situation.
Even major funds aren't sure which way to trade all the time, and/or
will only buy, or sell in areas where they feel valuation permits such.
In addition, because of the Central Limit Theorem (which means
normal distributions should appear in smaller subsets of larger skewed
data), we can also infer that because VWAP and regular moving averages
are mobile, eventually the currency, stock, commodity, whatever, will
revert back to the mean.
The reversion occurrence I've just mentioned is an absolute empirical
fact, as the mean is mobile.
What I'm saying is because the mean is following price, eventually the
currency (or stock, commodity, etc…) will retrace VWAP. The question is:
when?
The more data we're measuring, the longer price can stay away from
mean; however, eventually, price will return to the mean, because the
mean is following the price.
It's important to note that when trading equities, or other instruments
where VWAP resets at the end of each trading day, seeking mean
reversion positions (based on VWAP) on a swing trading basis is not
always the best idea.
Why?
Because at the end of the day (literally), the mean resets and there is no
more reason (in terms of day-to-day VWAP) for the security to revert
'across the mean' than any/all circumstances that caused the initial
divergence in the previous session.
In terms of day-to-day VWAP, we're talking about a 'resetting' of mass
each session. Thus, for mean reversion on a longer-term basis, either a

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greater amount of VWAP data must be studied, or another set of data like
price action (data without volume), must be taken into accord.
The issue at hand is on a daily basis, there are many various factors
affecting a stock, or currency.
(For a moment, we will focus an example on equities.)
Figure 11.1
Please take a moment to glance at
Figure 11.1, imagining the image as a
'topographic map' of intraday price data
(Stock XYX), based on the factors
affecting trading action.
Now, please image (for the sake of
example) Stock XYZ reported positive
earnings today, which have triggered
buying in the stock. The darkest regions
of the map specifically highlight earnings related buying, while the lighter
sections indicate buying due to earnings related news of another (though
related) company, which reported yesterday. Both sets of news are
positive, shown in the overall upward price action (as denoted in the data
above the flat plane, which is the previous session's closing price or
'breakeven' for today).
Again, because earnings of the 'related' (highly correlated) other
company were positive yesterday, and the earnings of the Stock XYZ are
positive today, both sets of news entice investors to buy more than sell.
Clearly, because price is ascending today, VWAP would travel upward
during the session as well.
However, what happens if the two previously mentioned companies
are tier two stocks (meaning lesser market caps) than the sector leaders.
Moreover, what if, a highly correlated tier-one company reports
significantly negative earnings numbers tomorrow?

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 Because the tier one company likely has greater pull on the entire
sector, the positive news of the two smaller companies could fall victim to
sector-wide selling, based on the negative news of the larger, more highly
coveted tier-one company.
What we're talking about is the larger gravity (weighting) effect of
highly correlated stocks, sector, index, market, or other financial
instruments that could influence the outcome of tomorrow's trading, over
stock-specific news of today.
In short, because we are resetting the mean (VWAP) each session (in
equities) performance of the benchmark must be evaluated by what is
taking place today, and only today.
What I'm saying, is whenever we reset the mean (the same would hold
true for a 5,000, or 10,000 tick reset in Forex), we must stop, take notice of
the event and reconsider the factors pushing, or pulling on the instrument
in question.
To rephrase, when VWAP is reset, the instance of price moving away
from the benchmark would not necessarily be a specific derivative of mean
divergence, or mean reversion from the previous session. Because VWAP
was reset, the occurrence would really be pure divergence, based on the
simple fact that the benchmark was just re-set to zero.
The longer VWAP is 'running' however, the greater the probability that
price will eventually revert to the mean, based on the concept that the
mean is following the price.
Where does all this lead us?
To a much needed discussion of the term 'benchmark.'

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 Most Retail Traders Never
Consider the Term
'Benchmark'

To some, it might feel as though the following discussion should have

come earlier in the book. And while (arguably) that may be so, I decided
to save it for when we were already knee deep in VWAP, as I believe
already having the visual picture of what VWAP is (in your mind), will
help the following concepts come through more easily.
Over the following pages, impatient traders will likely scoff at the
information and quickly breeze over the concepts of order flow and
benchmark trading.
However, I would like to mention the next few pages might be the most
important in this entire book…
We must have a better understanding of who is who in trading
(meaning who is buying and selling) and how and why such influences
volatility.
The following pages are critical for anyone seeking to move beyond
simply being an 'average retail trader,' to truly finding a greater
understanding of intraday volatility.
I've spent many hours attempting to understand why retail traders
fight –tooth and nail– understanding the larger 'paradigm' behind

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institutional order flow, versus the cowboy jockey directional 'give me a
quick and easy brainless technical indicator' mentality most at-home traders
embrace.
In the fall of 2008, I believe I (partially) found the answer…please allow
me a moment to tell you the story…
Over the final few months of 2008, my trading was suffering… I was
having trouble diagnosing the issues causing the poor performance, as it
seemed the more I looked, the less I came up with in terms of answers.

In the end, I found two main catalysts for the temporary deterioration
in my trading.
First, the market had changed and I hadn't.
I was still working on developing new models to compensate for the
excess volatility brought on by the financial crisis, while also attempting to
compensate for the moment-to-moment excess volatility of retail traders,
both of which had begun to surface in July.
I was not really having any trouble perceiving the larger direction of
markets, but I constantly found myself losing intraday.
In short, I was developing new volatility models in a rough market and
I was paying the price for deploying new concepts in real time, with real
money.
My Forex Force trading service on Wall Street Rock Star finished the
year up over 1,000-pips, but November and December were brutal.
There's another piece to the story here too…
In late October of 2008, I traveled to one last U.S. speaking engagement,
before leaving for China…
During a break, one of the attendees found me outside, and we began
to chat… A few minutes into our conversation the chap said, 'this is

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incredible information (referencing my delivery of common sense fundamentals),
but can you just give me something easy I can just make money with today.'
To date, almost no other comment by any reader, subscriber, or
audience participant has ever messed with my head more. I was so up-
ended by the comment; I had trouble returning to the room to finish the
talk…
It took about three months to figure out why the comment was
disturbing… What I've come to realize is:
When it comes to educating others, all my time and effort…years of learning…
All of my time preparing a clear, concise, cutting-edge understanding of
fundamentals within currency markets is/was a waste.
Wasted because most people do not want to know anyway.
I realized that most retail traders only want 'blue line crosses red line'
signals hand delivered, gift wrapped, without ever truly even lifting a
finger to learn about markets, or the indicators they're trading from.
From that day, I lost all of the wind in my sails to run the trading
service, and while my new models were still suffering in deployment, I
had lost the desire to trade too, which was really bad, because trading is
my bread and butter.
In January of 2009, I shut the service down and I will never spearhead
another intraday 'trading specific' service ever again.
We're planning on launching a new live trading room and a
professional trading research service on WallStreetRockStar.com this year,
but neither will be an intraday trading service telling people when to buy
and sell.
After months of brooding about the audience participant's comment in
the Fall of 2008, I realized I needed to let go of the service, because the
performance was suffering and I just wasn't into it anymore.
What I also realized was that most retail traders don't want to learn the
nuts and bolts of what truly moves markets… When I let go of the

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comment and concluded that this will likely be my last book…I again
found my passion for trading…
What I also come to terms with is an understanding that most retail
traders just can't see the value in understanding fundamentals. Moreover,
because applying fundamentals to intraday trading takes a significant
amount of effort, it's easier to just look for signals from a MACD, or
stochastics, or whatever else someone said works well. But regular
technicals (without a rock solid understanding of why what's happening is
really happening) only sets traders up for failure.
In the end, I ask you to please turn over every stone, including the
forthcoming discussion of buy side, sell side, benchmark, etc…
Sometimes the most important –and greatest– nuggets of information
are found in the most unassuming places, like the true foundation of the
events occurring, not in the outcome…the red line crossing blue line
technical events.
Also in my drawn out explanation of why most retail traders never
really consider what, where and why institutional trading is
happening…is simply in the question:
Why would retail traders be motivated to step into the minds of the big guys
anyway?
After all, retail traders are trying to make money moving in and out of
markets directionally, always with a short or long-term bias.
Institutional traders, however, are thinking risk and performance.
It's not the retail trader's fault really that he or she has no clue about
what's really driving much of intraday action. After all, most of the
information provided to traders regarding what to look at, why to look at it,
and how to trade it, is generally flawed from the start anyway.
Forex brokers aren't going to tell you, because most often they are in the
business of 'broker/dealer' meaning they're taking the other side of your
trade…

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 When we understand that much of intraday trading action volatility
has more to do with the term 'benchmark', over 'pick a direction', we begin
to put the odds back on our side.
I believe that if I were to ask 99% of the retail readers what the term
'benchmark' means, most would say 'index', or something similar. Yes,
indexes are 'benchmarks', but for our purposes, we're looking for
something different, something greater.
Benchmark –as we will use the term here- is the capacity of trading
efficacy, by which institutions and institutional traders are both: measured
and paid.
What we're talking about is 'buy side' versus 'sell side' versus buying and
selling.
One thing I know for sure is if I were to ask 10 retail traders (who have
never traded or worked for a financial firm professionally) what the differences
between buy side, sell side and buying and selling are, 10 out of 10 would
get the answer incorrect.
It just is what it is…
We need to know though, to be the best traders we can be…

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 BIOVAP Man and the Insanity
of Dr. Watermelon Stuffer

It is no secret; the business of trading is overcomplicated from the

start…
For the retail trader who attempts to dig into understanding of how
institutions work, the door is seemingly impenetrable.
Because of such, there is a massive breakdown in the retail
community's understanding of what 'buy side', 'sell side', and buying and
selling are.
Why should you care?
What we have to understand is that real trading is the actual
application of expectations to real markets.
Analysts analyze; however, traders apply money to reality.
The best analysts in the world often make the worst traders.
Why?
Because while they can perceive an outcome over the long haul, they
have no clue how to apply the information in the short-term.
When we truly attempt to understand how and why institutional traders
are doing what they are, and what they might do next, we're stepping out
of the analyst fairytale world and into the real battlefield of now.
The bottom line is, if we expect to succeed in trading we MUST take the
time to understand why what is happening today…is happening.

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 Why what is happening this hour, is happening this hour…
Why what is happening this minute, is happening this minute…
We must step beyond simple technical and fundamental indicators and
into the minds and motivations of big order flow...to finally see 'beyond
the curtain.'

Buy Side/Sell Side

Briefly, buy side is anyone who is trying to make money on the

perceived movement(s) of a financial instrument.
Conversely, sell side is anyone who is trying to make money on the
people…who are attempting to make money…on picking the direction of a
financial instrument.
Moreover, buying and selling is something anyone who wants to play
the game must do…
Both buy side and sell side…buy and sell.
Perhaps the only people who don't actually buy and sell (in the game of
buy side/sell side) are sell side analysts who are merely telling people
what to buy and sell, in an attempt to get more people to buy and sell.
Buy side analysts, are often making actual recommendations to buy or sell,
which a fund is actually taking action upon.
As Larry Harris notes in the book Trading and Exchanges, "buy side
traders are investors, borrowers, hedgers asset exchangers and gamblers."

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 (I hate to say it, but most retail traders (daytraders and Forex traders
specifically) fall more under the 'gamblers' category.
An important distinction
differentiating buy side and sell side
Harris points out is, "The Trading
industry has a buy side and a sell side.
The buy side consists of traders who buy
exchange services. Liquidity is the most
important of these services. Liquidity is
the ability to trade when you want to
trade."52
In terms of being 'retail' (a buy side
trader, just like a fund trader), you
are paying commissions for the
ability to guess whether a currency,
stock, or commodity is going up, or
down.
You are paying for liquidity,
which your broker is providing. The
broker is 'sell side', as he is providing
you with the means to place orders.
Also of important note, Harris points out the concept of 'movement of
current income into the future.'
Buy side traders are really using what they have now, in an attempt to
realize another value (hopefully greater!) in the future. One cannot trade
with more than they have now, as even with margin, once what you have
now is gone…you have nothing.
One of my favorite sayings of all time is from Warren Buffet who states,
"zero times anything is zero."
For example, as a 'buy side trader', you can leverage $10 into $100 (10:1
margin) in an attempt to make even more money directionally in markets,
but if you're wrong, and your original $10 disappears, you have nothing.

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 In detail, sell side is/are the people/companies providing buy side
with liquidity and/or services to effect and/or improve transactions.
In short, institutional traders who are 'moving orderflow' are sell side
traders.
Here's what's important to note, sell side traders can both work for a
corporation, or remain independent, utilizing the sell-side services of other
exchange related companies.
What I mean by this is, some
independent traders actually own a seat
on an exchange, where they effect
transactions to work orders for buy side
traders.
However, because they are not their own
clearing firm, they must utilize the sell
side services of another firm to achieve
liquidity.
Basically, when sell side is moving
orderflow, buy side individuals or funds
are using their services, and are either
willing to pay a higher price for their
tenured trading ability to work large
orders (usually because of long-lasting
relationships), or whatever 'edge' the sell
side firm, or trader brings to the table, in
terms of helping the buy side achieve a
more prosperous fill.
These guys are a type of sell side middle-men, and are acting in a
'broker' capacity, but utilize another firm (a dealer), to clear the actual
trades.
Really, sell side means dealer, broker, or 'duel traders.' It is also
important to note, exchanges are in the mix as well, competing with
brokerage houses to 'arrange trades.'
Mark Whistler • Volatility Illuminated • Page 298 of 363
 Finally, in our discussion of sell side (and buy side, in terms of
definition), it is also important to note (as Harris points out); sell side
ONLY exists because the buy side is willing to pay for their services.
Now that we've covered buy side and sell side…a few readers may still
be inquiring: Who does the buying and who does the selling…buy side, or sell
side?
Both. Both buy side and sell side…buy and sell.
The terms buy side and sell side are simply definitions of the 'capacity'
of buying and selling motivation.
The 'capacity' of buy side buying and selling is to make money on the
movement(s) of financial instruments. The 'capacity' of sell side buying and
selling is to provide buy side with liquidity, or to create 'price
improvement' on large orders.
Easy enough right? Right.
As I write, I'm wondering if readers are now asking what's the larger
point of this entire discussion – of buy side and sell side? If you are, I
applaud you. The larger picture is exactly within the question itself– the
larger picture…is 'the big picture' of why volatility exists within intraday
trading in the first place, but it seems to me that almost no retail traders
actually 'get it.'
See, most retail traders consider the 'big picture' to be their monthly
charts, or 'those boring fundamentals.'
However, in terms of intraday volatility, the big picture is really within
institutional benchmarks. When we understand institutional 'benchmark
trading' we will also find a greater understanding of:
1. Why retail technical indicators are built for failure…
2. Why most retail traders lose…
3. How the big guys perceive information differently…

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 4. Why having an institutional mindset is so important…
5. How we can use volatility, probability and benchmarks (like VWAP)
in our own trading to take advantage of potential institutional order
flow pending….
I would like to take a moment to quote John Pinney (JP Morgan) from
the book, Coping with Institutional Orderflow (Robert A. Schwartz, John
Wiley & Sons, 2007) who stated, "I will do my best to convey the essence
of the research we recently completed on the cost of dynamics associated
with institutional orderflow. To a retail trader, the stock exchanges look
like a vending machine. An order is placed, the delivery is made and the
execution comes back. The broker has completed his or her job, often
within seconds."
Pinney is right, the retail trader DOES believe his, or her platform is
nothing more than a vending machine…
Order in, position in, order in, position out.
It is here that we further answer the question of why the retail trader
never even knows to consider the mindset of institutional order flow…
Pinney goes on to state, "But this is not the case for the institutional
trader. As we know, the order size – the 'peg' of institutional trading
interest – is much larger than the 'hole' size of the exchange process."

PLEASE READ CAREFULLY:

Take a moment to ponder what Pinney has just described as the
concept of institutional orders being larger than the 'hole' of the exchange
process…
If you take one thing away from this entire book…
Please take the following words:

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 Institutions must constantly break up large orders into smaller
chunks; otherwise, they would constantly be attempting to shove a
watermelon through a muffler.

Not only would the people around them notice, but also, the event
would be both sloppy and ineffective…
In normal circumstances, sell side traders are able to dice the
watermelon (large order) and discreetly slip the pieces into the market
one-by-one (iceberging).
However, what happens if the car (price) the muffler is attached to…is
about to leave the parking lot?
Even institutional traders are sometimes caught off-guard and are
forced to start shoving the watermelon through…you know what.
What we're talking about is volatility…derived from big buy side
politely asking sell side to insert watermelon into mufflers, all day long.
Sell side is Dr. Watermelon Stuffer and all day long he's receiving
orders from Boss Big Bank (buy side).
Moreover, what if he's been told to get the watermelon in the muffler
'or else' and the car starts to move? You guessed it; he might have to run
after the car, trying to shove the whole watermelon (or pieces of) in to the
muffler, before the car (price) gets away completely.
What we are talking about is the occurrence where markets begin
moving (on low, or high volume) and are seemingly propelled by constant
buying, or selling.
Now, assume you are Dr. Watermelon Stuffer for a moment and you're
a little smarter than most…
You know the driver is 'just making a delivery,' and he will actually be
back in about 15-minutes… It's a good thing you know too, because you
still have half a watermelon to cram into the muffler.

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 Of course, when the car pulls back into the parking lot…you would
start cramming again, before the car pulls out another time. Big Boss Bank
is paying you on your performance…based on how much of the
watermelon you can get into the muffler, as neatly as possible, before the
car pulls out of the lot. If the car pulls out of the lot and you've been able
to neatly (and discreetly) dice the entire watermelon and insert it into the
muffler, you will be paid handsomely.
But what if you suddenly figured out you'd goofed and crammed all of
the little, neatly sliced pieces of watermelon into the wrong car?
It's going to be ugly trying to get the watermelon back out.
What we're talking about is volatility, when the big guys are wrong.
What if, you crammed the whole watermelon into the muffler and it is
the not only the wrong car, but the driver just got in?
Roll up your sleeves, because things are about to not only get messy,
but frantic, at the same time.
What we're talking about is volatility.
What if you have an absolutely massive watermelon to stuff…but you
know the driver's schedule, and thankfully he will be back 30-minutes
after each time he leaves to make a delivery…
Each time the car pulls out of the lot, you'd likely just take a seat and
wait for him to come back, to begin inserting more of the watermelon into
the muffler.
What we're talking about is the occurrence of institutional traders
buying at, or near VWAP (or other benchmark) and why they don't often
chase price…
Unlike the retail 'breakout' trader, the institutional watermelon stuffer
knows the car will be back…

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 So where is the retail trader trading in this whole event of stuffing
watermelons into mufflers?
He's standing over on the curb, waiting for the driver to pull by, to see
if he can exchange a couple quarters for a dollar bill…completely oblivious
to the whole stuffing of watermelons thing, happening just a few feet away.
Fact is, when we understand what's happening on the institutional sell
side, we suddenly understand 'why that really weird uptight guy standing
behind the car – is always holding a watermelon.'
However, to see Dr. Watermelon Stuffer, we have to wear special
glasses, because there's one thing I forgot to mention… Dr. Watermelon is
invisible most of the time.
To see him, we have to wear special volatility / probability, VWAP,
TWAP, LHOC benchmark glasses.
And we're not always going to be able to see him, even when we think
we can, but the longer we wear the glasses, the better we will become at
spotting Dr. Watermelon Stuffer, even when he's mostly transparent.
(By the way, these are special cars…that even when the mufflers are crammed
with melons, the engines do not cut out… Things just run differently in
Financial-Market-Land.)
Here's the thing about almost all of the 'other' retail traders though…
They're standing around on corners, all with the same quarters, trying to
exchange their change for the same dollars…
They're easy to spot too, as they're all wearing the same fancy pants and
'blue line crosses red line' MACD, stochastics, Fibonacci, moving average,
relative strength [whatever] jackets.
But they're all oblivious to the real game.

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 The real game isn't even about quarters and dollars, it's about
cramming watermelons into mufflers, before the driver leaves with the car
in one direction, or another. Fact is, all of the retail traders (in their fancy
technical analysis jackets) never even understood the real game from the
start, which is exactly why they will always be exchanging quarters for
dollars on corners.
However, because they're all just standing there, obvious to the world,
money in hand…eventually, they all get mugged too.
Many retail traders believe they have an edge though…
They've got a little buddy, who happens to be real fast at math, and can
regurgitate fancy pants signals all day long.
He tells the retail traders (who think they are smarter than the collective
whole) when other retail traders are about to change jackets. Sometimes his
fancy pants signals work, but really, he's missed the whole game too.
And eventually, when the driver changes schedules, or routes…or
when Dr. Watermelon Stuffer changes his entire outlook on his
watermelon stuffing process, or even worse, gets a new tool to stuff
watermelons with, the retail trader's little buddy (FYI, his name is EA, for
Expert Advisor, but his Mom calls him Black Box System) starts to get it
wrong… One more time, the retail trader is just stuck there, standing on
the corner with his little pal, getting mugged (again!), scratching his
head…
See, the whole game is really about the watermelons and the driver.
Concerning the driver, it's about when he's going, why he's going, and
where he's going…
While the car is 'price', the driver's name is 'fundamentals'.
Let me tell you, since the driver has so much on his mind, he changes
his philosophy and outlook daily…

Mark Whistler • Volatility Illuminated • Page 304 of 363

 Sometimes though, he gets an idea in his head…and he just keeps on
going, until he's out of gas.
In rare occurrences, the retail trader actually really attempts to figure
out the driver's schedule, but the occurrence is rare.
Regardless, retail traders fail to understand the money (the real money)
isn't just in figuring out the driver's schedule, but ALSO in knowing (and
seeing) Dr. Watermelon Stuffer's probable plan too.
For the retail trader, the real money is in betting other's (who are
watching the car too), when the driver will come and go… Moreover, the
intraday trader who has the special x-ray glasses though, knows to only
bet when Dr. Watermelon Stuffer is at work behind the car, because when
Dr. Watermelon Stuffer is furiously in motion, the car is about to move.
Volatility and probability help determine when the car is about to
move, how far it might go, and when it is coming back. Benchmarks are
knowing where Dr. Watermelon Stuffer may begin stuffing, or start
retrieving his crushed fruit, or used in conjunction with volatility and
probability, where he might just decide to sit the whole game out for
awhile.
Fundamentals tie the whole thing together.
Typical technical analysis (used on its own) is a joke.
Remember the first chapter about Superman wearing his underpants on
the outside?
The retail trader who understands Dr. Watermelon Stuffer is: BIOVAP
Man – Benchmark Institutional Orderflow Volatility and Probability Man,
and is a superhero for sure…even if he looks a little goofy.
He wears his underpants on the outside, and he sports x-ray glasses.
Dr. Watermelon Stuffer tries to make fun of him, but BIOVAP Man just
smiles, nods and replies, "Whatever melon-boy, just keep on stuffing and
everything will be alright…"

Mark Whistler • Volatility Illuminated • Page 305 of 363

 CHAPTER TWELVE
WAVE • PM

As we enter Chapter Twelve, there are likely some questions still

remaining on how WVAV and order-flow come together in the larger
picture at hand.
As there should be…
Over the following pages, however, we will begin to tie all of the pieces
together in one large cohesive model, for traders to utilize as they navigate
markets daily.
With all of the aforementioned in mind, please put any questions on the
subject of Dr. Watermelon Stuffer and BIOVAP Man on ice for a few
moments, as we cover the final piece of the larger whole: WAVE • PM, or
Whistler Active Volatility Energy • Price Mass.
In our previous discussions of mass, we know two things:
1. Mass is a larger component of price movement, via distributions,
seen through a Newtonian lens where: Force = Mass * Acceleration,
or Mass = Acceleration / Force.

Mark Whistler • Volatility Illuminated • Page 306 of 363

 2. The larger the mass, the more difficult an item is to move.
Conversely, the less mass an item retains, the easier it is to not only
spur into motion, but keep in motion, as well.
With common sense physics in mind, it is easy to begin to understand
why unforeseen volatility sometimes surfaces within almost any market,
especially in terms of 'head fakes'.
When an equity or currency pair is staging a supposed breakout, but
there is simply too much mass to be moved, it 'just makes sense' that price
would fail to continue upward, or downward…and thus, fall back into the
previous range.
What we are really talking about here is the compression and
expansion of energy, in terms of mini distributions.
If a distribution is already at a point of maximum expansion (too much
mass), the likelihood of continuation (trending) into a higher or lower
range…is not very likely.
As a picture tells a thousand words, it may be easier to soak up the
previously mentioned concept with an actual chart…
Figure 12.1 shows the EUR/USD on an hourly basis, where I have
drawn a set of 50-period 3.2 STD volatility bands, to show the 'outlier'
points of the distribution.
As you can see, during the recent rally, the 50-period distribution was
'expanding' in width, or in other words…mass. As the EUR/USD traveled
into the 1.4030 area, the 50-period mass became too 'heavy' for the pair to
continue upward…
Thus, as the consolidation (and compression of the 50-period 3.2
volatility bands) shows, the pair traveled sideways, thus allowing the total
mass of the distribution to 'compress' for another move.
The solution to the problem of being able to readily 'see mass' within a
stock, currency pair, or commodity? The solution is rather simple;

Mark Whistler • Volatility Illuminated • Page 307 of 363

however, like most concepts in Volatility Illuminated, the theory was the
most difficult part to unearth…

Figure 12.1

The theory behind measuring the mass of subset distributions is simply

to visually 'map' or identify the total width of both short and long-term
distributions, through a value converting mass into an easily
recognizable/understandable format, like an oscillator.
Thus, what we have taken two sets of Bollinger Bands (volatility bands)
and simply normalized the total width of each, in range from 0 to 1.
What this means is with our new 'gauge' (imagine an RPM gauge for an
engine) we know the closer the oscillator is to 1, the more mass a
distribution has, and the less likely the chances of a continued up, or down
move, without some sort of consolidation 'cooling' or 'compression' of
energy first.

Mark Whistler • Volatility Illuminated • Page 308 of 363

 In the following image (Figure 12.2), readers will notice I have added
the WAVE • PM oscillator in the bottom window…
Please observe that there are two lines in the oscillator, one measuring a
50-period distribution, and one measuring a 14-period distribution.
Obviously, the 14-period line is the more jagged of the two, as we are
measuring less data.
Below the 0.5 oscillator level, mass can said to be consolidating, while a
move above the 0.5 is generally marked with a period of distribution
expansion, or extended price movement.
It is VITAL to note that the WAVE • PM does NOT give any
indication to direction whatsoever; rather, the oscillator is a gauge of
potential energy left within a distribution's expansion cycle…
If price is moving to the downside and WAVE • PM is moving up, the
event simply means there is more 'gas' left for an extended move…
Stating the aforementioned another way, if price is moving downward
and the 14-period WAVE • PM is traveling upward; the occurrence
indicates the 14-period distribution is widening out, or releasing energy.
Conversely, if price is moving upward and the 14-period WAVE • PM
(for example) is traveling upward, the occurrence indicates the 14-period
distribution is widening out, or releasing energy.
It doesn't matter whether price is moving up, or down, if WAVE • PM
is moving up, the distribution measured is 'expanding' and/or releasing
energy. If WAVE • PM is moving down, the distribution measured is
'compressing', or storing energy.
If price is moving upward and WAVE • PM is moving upward, the
event simply means there is more 'gas left' in the move. When WAVE •
PM is between 0.7 and 0.9, the event is similar to the RPM gauge on your
car showing about 2,800 RPM's, or maximum pull…

Mark Whistler • Volatility Illuminated • Page 309 of 363

 Figure 12.2

In the above image, you will notice when short-term WAVE • PM is

descending; the EUR/USD is in phase of consolidation. Conversely, as
noted in the three right-most arrows, when short-term WAVE • PM starts
to move above the 0.5 mark, the EUR/USD begins breaking out of the
relative range to the downside…
As we've already covered in the book, we know that when short-term
volatility is compressing, versus longer-term volatility, the changes of
trending a slim. However, when short-term volatility is torridly
expanding, the occurrence is telling us prices are on the move and short-
term volatility is attempting to push longer-term volatility (or the longer-
term distribution) upward, or downward.

Mark Whistler • Volatility Illuminated • Page 310 of 363

 Again though, WAVE • PM does not provide an indication of direction,
rather, the indicator shows whether a move presents high probability of
follow-through, or not, based on how much 'mass' there is to move. It's
just common sense that a distribution with less mass is easier to move,
than a distribution with a significant amount of mass.
Now, please look at image 12.3, for more insight into the WAVE • PM
indicator…
As you will notice, in every instance the short-term WAVE • PM mass
line (denoted as the thicker of the two indicator lines) falls, the EUR/USD
experiences a period of comparatively lateral trading, or a pullback in the
relative range. WAVE • PM is visually identifying the 'compression' of the
short-term distribution within the larger distribution. Just FYI, we are
mapping a 50-period 3.2 STD and the 14-period 3.2 STD in the example
here.
However, it really would not matter if were mapping 1.2-standard
deviations, or 3.2-standard deviations, as both show the expansion and
compression of mass.
What you will also notice is in the first part of the move up, the longer-
term distribution was in an 'expansionary' phase, but then started to
compress while the EUR/USD continued the final phase of the upward
movement.
Why?
Because when a trend first begins, the multiplier effect in the standard
deviation formula causes both bands to widen out… However, for price to
continue in one direction (up, for example) the bottom band must
eventually turn around and begin moving upward with the price…
The two bands cannot move away from one another infinitely, as the
'lower' third standard deviation must -eventually- move with the
distribution, upward, as noted in the example here.

Mark Whistler • Volatility Illuminated • Page 311 of 363

 Thus, if a trend is real, the longer-term distribution (again, we're
measuring the longer-term distribution via 50-periods of data here), will
eventually turn upward and as the lower band pulls up, will show
consolidation in the WAVE • PM indicator.
What this means is two things:
1. During the initial expansionary phase of a trend, both long-term and
short-term WAVE • PM should witness upward movement.
2. As the top of a trend nears, longer-term WAVE • PM will begin to
turn over and 'consolidate.' By the term 'trend', I am referring to the
'cycle' of the relevant trend either up, or down.

Figure 12.3

Mark Whistler • Volatility Illuminated • Page 312 of 363

 What we know from all of the above is our greatest probability entries
(to capitalize on trending) occur when both short and long-term WAVE •
PM are below 0.5 and are beginning to move upward.
To active traders, WAVE • PM below 0.50 indicates that energy of both
short and long-term distributions has compressed, and we currently are
sitting in the greatest possible moment for a potential breakout (or
breakdown) to be followed by trending, via energy expansion, because
both short and long-term distributions have little mass to move.
Again, the lesser the mass, the greater the probability of seeing 'follow
through', once order flow begins pushing…
What's more, as we previously covered in Chapter Ten, once a stock, or
currency begins ascending, we can view the event as the 'car' beginning to
move out of the parking lot.
If Dr. Watermelon Stuffer did not previously have all of his melon in
the muffler, chances are, he's going to get a little messy if he thinks the car
is about to pull out of the lot. Henceforth, the instance of 'quick
acceleration', often appearing when a pair initially breaks above (or below)
a consolidation range, seen through a breach of support, or resistance.
To reiterate some of what we have just covered, when WAVE • PM is
declining (especially noted in short-term WAVE • PM falling) the
distribution is experiencing consolidation and thus, lateral trending will
likely occur.
When WAVE • PM is witnessing a period of expansion (upward
movement), the greater the likelihood of continued trending, especially if
the WAVE • PM indicator is rising out from underneath the 0.5 area.

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 WAVE • PM, WVAV and Quad
CCI

Now, pulling everything together, we will see the 'perfect setup', which
well-informed currency traders (and even stock, commodities and futures,
etc…) will want to look for… The following example shows a downward
move; however, such is precisely what we look for in an up-move, as
well…
In the following image of the EUR/USD, traders will notice the pair
had consolidated near the 1.4080 to 1.4120 area, and was threatening a
break…
Most important, traders will notice both the 50-period and 14-period
WAVE • PM lines were trading just below 0.5, as the EUR/USD first broke
support in the 1.4044 area. Confirming a potential down-move, 100-period
CCI was just falling into the 'Containment Zone', meaning that it was
falling back below the 1.25 standard deviation area, on the way back to the
mean. Next, traders will also notice 50-period CCI had already also
broken into the Containment Zone, while short-term 5,000-tick VWAP 3.2-
STD volatility bands (dashed lines) were expanding outside of long-term
volatility, as measured by 10,000-tick VWAP 3.2-STD (solid black lines) in
the price portion of the chart.

Mark Whistler • Volatility Illuminated • Page 314 of 363

 The chart was telling us, 'short-term volatility is spiking outside of long-
term volatility', while also indicating mass had 'compressed' enough that
probability of trending was high. In other words, price distribution mass
had compressed to a point where a burst of downside trading action could
easily get the ball rolling… And it did…
The EUR/USD quickly fell over 100-PIPs, before the WAVE • PM 14-
period line turned over to 'compress.'
At the same time, short-term VWAP volatility pulled back inside of
long-term volatility, thus giving us further indication that the EUR/USD
was about to enter a period of 'pullback', or consolidation.
During this time of consolidation, not one of our CCI's really gave us
much indication of the pullback happening, other than the 14-period,
which rallied from below -100 almost into the 0-line, before failing again.
Why?
Because CCI only measures prices outside of the 1.25 standard
deviation area. However, price consolidation on shorter-term time periods
can occur, without longer-term CCI breaking back below the 1st-standard
deviation. The occurrence really indicates the longer-term distribution is
still on the move, however, in the short-term, a pullback to the mean is in
store.
The savvy volatility/probability trader, however, was cognizant of the
pullback, as noted in the 14-period WAVE • PM falling short of the 0.9
line, declining down into the 0.55 area…
Because short-term mass had compressed, smart volatility traders
would have begin looking for another leg down in the move.
Coincidentally (or not), during the pullback, the EUR/USD rallied right
up into 5,000 and 10,000-tick VWAP, where it again failed.
Why the failure at VWAP?

Mark Whistler • Volatility Illuminated • Page 315 of 363

 Because if a move is for real, the benchmarks are precisely where Dr.
Watermelon Stuffer will begin 'cramming his watermelons into the
muffler', to achieve the best possible benchmark performance fills, for the
day. The institutional trader knows that should the EUR/USD drop again
(which it did), he needs to execute his orders 'better than' VWAP (which he
did), as VWAP drops with sustained selling. As VWAP declines later in
the session, his previous fills into VWAP will then show 'better than
VWAP' performance.
Do you see how everything we have covered comes together?
What we're really talking about is watching 'mass' for 'viability' of a
sustained move, and then watching for the precise points during the move
where Dr. Watermelon Stuffer must begin wading into markets in order to
achieve the best fills possible–where his performance will be measured- in
relation to VWAP. A pullback to the mean (VWAP) is to be expected in
any ascending, or descending move… However, when longer-term CCI is
indicating that the instrument is still trading outside of the 1st-standard
deviation, or below the mean, we know the trend is still in effect. Then, if
mass (as measured through WAVE • PM) still has room to widen and
short-term volatility spikes outside of longer-term volatility, we know to
immediately take positions with the trend, to capitalize on another bolt of
price action.
Again, we can look for true 'vigor' where a move starts and ends,
through the expansion of short-term volatility, outside of long-term
volatility, and conversely, where lateral trading (back to VWAP or a larger
reversal) may take place, through short-term volatility compressing back
underneath longer-term volatility.

Mark Whistler • Volatility Illuminated • Page 316 of 363

 Figure 12.4

Moreover, in Figure 12.4, you will notice I have marked longer-term

(50-period) WAVE • PM as seemingly dangerous, when it was trading
above 0.9.
What the occurrence meant to us was the distribution was too wide,
meaning it had too much mass, and the likelihood of consolidation, or a
reversal was highly likely.
In the above case of the EUR/USD, exactly such happened, as just after
the 50-Period WAVE • PM line started to fall back below 0.9, meaning the

Mark Whistler • Volatility Illuminated • Page 317 of 363

distribution was compressing, the EUR/USD experienced a rugged period
of lateral/choppy trading.
Personally, during periods of longer-term distributions compressing
(after a large upward or downward move), I prefer to just sit out of
markets and let the other guys slug out choppy sideways trading…
Then, when both the 50-period and 14-period distributions have again
consolidated, I will look for short-term volatility spiking outside of long-
term volatility (and a breach of major support, or resistance), to take a
position 'with the trend.'
In essence, we should refuse to take positions when 'mass' is too large
and the risk of mean reversion choppy trading is substantial…unless of
course, we are specifically attempting to take advantage of a mean-
reversion type of position.

In the end, when we apply volatility/probability to the larger concept

of subset distribution mass compression and expansion, we not only are
able to navigate markets with incredible perception, but are able to
transcend intraday volatility that kills most traders.

Mark Whistler • Volatility Illuminated • Page 318 of 363

 CHAPTER THIRTEEN
The Dynamic Movements of
Subset Distributions

Within the following pages, the concepts presented are intended to not
only challenge the reader's perception of traditional descriptive statistics
and distributions even further, but the greater awareness volatility and
probability within markets as well. Moreover, the application of
volatility/probability to markets was actually derived through countless
hours of philosophical-reasoning behind the 'theory' of the concepts at
hand.
Beyond math, the principals within the final chapters of Volatility
Illuminated are intended to invoke fresh conversation about common
perceptions of accepted standards of price movements within markets.
It is the author's intention to show that both empirical and non-
empirical events within time, existence and markets are comprised of both
normal and non-normal distributions, whereby the identification of an
imperfection within the smaller subset of distributions surfacing in the
larger skewed distribution of markets (and time) is actually the
'imperfection of perfection' that must remain for time to persist, markets to
move, and stretching to the bounds of philosophy, to empirically prove
some of the toughest questions regarding price action, all at the same time.

Mark Whistler • Volatility Illuminated • Page 319 of 363

 In essence, identifying imperfection within subset distributions
validates volatility and movement within markets, time, and history.
Furthermore, the author will show that volatility within distributions is
relative only so far as probability -measured in standard deviations– infers
information (and subset distributions) can never maintain a static state.
However, much like time will not cease to progress, neither will the
movement of information affecting markets and life; thus the traditional
perception of risk probability and standard deviations as static…is flawed.

Within distributions –and the outliers of volatility- resides variance, or

the probability of tails. However, when understanding that markets will
never remain stagnate, one comes to terms with the understanding that
'outlier variables' are actually the pivot points whereby markets shift,
prices move, distributions evolve and time progresses.
Historically, participants have approached markets (in terms of
descriptive statistics) with the perspective that one may continually rely on
mean-regression empiricism to 'contain risk' and perceive outliers of
volatility, through probability. Much like time, the validation of a mobile
mean propagates that markets, or the actions of participants will follow the
mean itself. However, within markets, mean follows price (and the larger
shift of distributions), which can only surface when outliers of traditional
probably fail.
The author challenges whether it is truly probability that fails at these
extreme points within distributions, or rather, whether the greater
perception and implementation of probability, which is/was perhaps,
flawed from the start?

Mark Whistler • Volatility Illuminated • Page 320 of 363

 The Never-Ending Search
behind Probability
Distributions

Probability theory is generally thought of as the identification and

measurement of events within random phenomena, in an effort to unveil
statistical patterns and transparency within the seemingly arbitrary
occurrences at hand.
It is important to understand that markets transcend rational
probability analysis of 'games of chance', as the underlying fundamental
events are really not 'random' whatsoever.
As Jaume Masoliver, Miquel Montero and Josep M Porra stated in the
December 1999 paper A Dynamical Model Describing Stock Market Price
Distributions,
"One of the most important problems in mathematical finance is to know the
probability distribution of speculative prices."53
The authors explain traditional Gaussian measurements often fail in
markets as, "Gaussian models are thus widely used in finance although as
Kendall first noticed, the normal distribution does not fit financial data especially
at the wings of the distribution."
The aforementioned authors hit the nail on the head, in that traditional
implementation of a Gaussian distribution within financial markets fails to
consider the extensive volatility produced outliers that commonly surface.

Mark Whistler • Volatility Illuminated • Page 321 of 363

 Moreover, within the Central Limit Theorem, Wall Street has
historically made the mistake of assuming a finite mean and variance,
which repeatedly falls victim to unanticipated risk, losses and default as
the distribution at hand slides away from the preconceived outliers of
normal probability.
The issue at hand within traditional analysis of probability and
volatility is simply the continued attempt to measure finite variance in an
effort to locate mean and outliers of probably.
Even when attempting to apply multi-dimensional alternatives like a
multivariate Gaussian distribution, or matrix normal distribution, markets
seemingly incorrectly assume price action is linear, or in effect: not.
The same problem is again encountered in the previously mentioned
models, in that when one attempts to identify the variance in distributions
at all, the conclusion is a failed measurement of deviations from normality.
Within this line of thought, the same problem arises repeatedly…that
regardless of man's attempt at identifying probability and volatility within
any given distribution, the grave mistake of assuming a finite variance has
been, or is to be, made.
Referencing the paper from Masoliver, Montero and Porra again; the
authors conclude, "Summarizing by means of a continuous description of
random pulses, we have obtained a dynamical model leading to a probability
distribution for the speculative price changes."
To rephrase, there is substantial brilliance within Masoliver, Montero
and Porra's modeling; when considering a larger failure of understanding
is taking place within most statistical thinking -regarding markets-
whenever considering markets are static, or that distributions are not
constantly in motion…
Continuing our discussion of the historical study of price distributions
and probability, it can be said that the larger goal of most eco-physics
statisticians has historically attempted to identify potential tails for prices
and returns within distributions.

Mark Whistler • Volatility Illuminated • Page 322 of 363

 Case in point, quoting the paper Stock Market Return Distributions: From
Past to Present submitted to the Institute of Nuclear Physics, Polish
Academy of Science in 2007 by S. Drożdż, M. Forczek, J. Kwapień, P.
Oświe¸cimka and R. Rak, "Much effort has been devoted on both the empirical
and the theoretical level to such phenomena like fat-tailed distributions of financial
fluctuations, persistent correlations in volatility, multi-fractal properties of
returns etc. Specifically, the interest in the return distributions can be traced back
to an early work of Mandelbrot, in which he proposed a Levy process as the one
governing the logarithmic price fluctuations."
The authors continue with, "This empirical property of price and index
returns led to the formulation of the so-called inverse cubic power law, which was
soon followed by an attempt of formulating its theoretical foundation. Subsequent
related study revealed that, opposite to the earlier outcomes of, the tail shape of the
return distributions might no longer be so stable along time axis."
The aforementioned study of price action examined American Stock
Market companies from 1994-1995 and 1998-99, but then extended to
examine 1000 of the largest American companies. The authors concluded,
"The difference of the results for the same market but for different time intervals
might suggest that the scaling behavior is not stable and depends on some crucial
factors as, for example, the speed of information processing which constantly
increases from past to present."
Despite all of the incredible breakthroughs in financial modeling over
the years, it may be possible one aspect of 'modeling' statisticians have
missed is one of simplicity, in that prices, given the continual urge of men
to profit, will never remain stagnate and thus, with each passing day,
present a new 'paradigm' of subset distribution movement. Thus, perhaps
true understanding to movements within markets (past, present and
future) simply because, as is the nature of man, overcomplicating matters
seemingly creates validity, especially if the true answer is/was in plain
sight from the start. In reality, the answer to many of market's failed risk
modeling is not in the larger consideration of the macro picture, but in the
oversight of the power within smaller subset distribution movement.

Mark Whistler • Volatility Illuminated • Page 323 of 363

 To shed a slight bit more light on this understanding, the author would
like to politely request the reader to keep an open mind to a potentially
larger paradigm shift in the preconceived understanding of probability/
volatility and distributions, as a measurement of tails, risk and returns.
Instead, our greater understanding of dynamics behind the movement of
subset distributions altogether may just very well be the key unlocking
answers to all of the above.

Chinese Restaurant Process,

Probability/ Volatility and
Distributions

To find a greater understanding of market movement's we must keep

Levy processes in mind; however, the true answer within probably,
volatility and distributions may actually be found in the evolution of
techniques used to derive machine learning.
As a brief definition, machine learning is the intersection of computer
science and statistics. Computer science is the measurement of data and
statistics apply probability. Ironically, while many academic institutions
and Wall Street quant teams have long-since focused on Levy-based
models, the actual answers to currency market movements may actually be
within machine learning, whereby we are able to identify clusters of

Mark Whistler • Volatility Illuminated • Page 324 of 363

market data and then make good decisions with poor and uncertain
(noisy) data.
The evolution may have come about as traditional Levy models have
assisted in the pricing of risk, the same models perhaps failed in predicting
the larger movements of distributions (and markets) overall.
Historically, with the implementation of statistics in markets,
quantitative analysts have assumed pricing data within markets as
random variables with real vectors. However, within the framework of
the theory presented here, price action within markets is actually
comprised of complex data structures requiring more evolved methods of
measurement and inference.
Nonparametric Bayesian Methods eloquently help us see why this
progression in thought is necessary. Within Nonparametric Bayesian
Methods, as price data surfaces, we begin to see 'clusters', which
statisticians historically have used in an attempt to 'break out' Gaussian
models. The unknowns within cluster centers are known as theta, while
the size of each cluster, is better known as π.
Cluster centers
θ∈R^2d
Whereby we attempt to locate theta within the script, assuming the data
is two-dimensional.
Cluster proportions
π∈R^d
Thus, we attempt to locate theta within the script, assuming the data is
two-dimensional.
X_(i ~) N(θ_(j,) σ^2 I )
With probability π_i
P(θ,π )prior

Mark Whistler • Volatility Illuminated • Page 325 of 363

 By using Nonparametric Bayesian Methods the outcome is similar to
Bayesian inference, but with an infinite amount of parameters. The overall
goal is to use the clusters to dissolve the larger model, which in terms of
price data, can be inferred as the geometric presence of a one-dimensional
chart.
Stock market data is similar to stick data and can be measured via
Dirichlet Process, thus creating a 'picket fence', or random probability
distribution summing to 1. As the data grows, the coherence of the
probabilistic model also continues to gain momentum, as much like
protein folding and density estimations, we are able to move beyond the
historical attempt to measure risk and valuation.
Rather, we may instead be able to locate order flow and volatility
transparency through subset distributions (clusters of price data), seeking
out angles of movement through density of order flow, potentially
surfacing within currency markets.
In essence, when we begin to transcend the thought process that price
data is flat, we can begin to measure the total mass of clusters and thus, the
density and angles of potential movements at hand.
At the end of the day, when one is able to perceive 'density' within
markets ahead of the game, the larger paradigm of risk modeling quickly
changes, all at the same time.
Before beginning the larger discussion of Beta Processes, we will first
quickly cover the Poisson Process and Levy Process. The Poisson Process
allows us to identify random points falling into an interval, thus deriving
intensity and density within a distribution.
We must find the "measure" within the Poisson Process, which gives
the 'mass' to a set, thus providing density within the data set.

Mark Whistler • Volatility Illuminated • Page 326 of 363

 Probability Density
Function (PDF)

Much like the decay of atoms holds a significantly large number of

possible events, each being rare, so does the larger set of outcomes within
any given period of price action within markets.
With a greater understanding of the Poisson Process, we are able to
derive even more information from the Levy Process, whereby we derive
stochastic time series, or random processes.
As information evolves, we will break out Brownian motion, thus
invoking the Langevin equation as well.
Before moving too quickly (circling back to Levy Process) one might
think of market action much like atomic structure, in a discrete
distribution, when we measure mass of price data unfolding in markets,
we find independent conclusions, with the data sets as disjoint.
Thus, the Levy measure allows us to locate mass over omega Ω, which
in the case of currency markets, would be time. The Levy measure
becomes the base measure of the Poisson Process, whereby mass is the
weight of data in time intervals. Because two prints within markets cannot
occur at the same moment in time, and must fall into a time sequence, we
are able to rationally justify this thought process.
The Levy Measure then helps calculate the mass on omega, deriving
intensity, whereby be arrive at the Beta Process, while pulling in the
concept of Brownian motion all at the same time, and in essence, creating a
type of superprocess.

Mark Whistler • Volatility Illuminated • Page 327 of 363

 To back up for a moment, the Levy process (holding the Levy measure
within a Poisson Process) allows for inference of a random discrete
measure presenting mass to disjoint sets. However, much like atoms are
not fixed, neither are markets.
With the aforementioned in mind, we will find some clues within the
Beta Process, whereby we discover similarities of market movements,
volatility/probability and pricing with that of atomic structure. Similarly,
as Brownian motion gave birth to Particle Theory, and continuous-time
stochastic processes, Beta Processes hold that the data within a distribution
can be continuous, discreet, and mixed. The initial inferences derive that
all values can only sum 1, with all points presented as real numbers.
Bernoulli Sampling allows us to break out individual distributions
within the larger infinite time scale, thus bringing us to "Indian Buffet
Process." Within the Indian Buffet Process (Chinese Restaurant Process),
one can think of the market as a large restaurant, where customers step in
to try an infinite amount of dishes, whereby each customer can try a dish
on the buffet line, at random. When a customer tries a dish (buys a
currency) his likelihood of trying that dish is equal to the probability of
those who have previously tried the same dish, which is the partial
explanation for momentum within markets, when breakouts and
breakdowns occur. However, when ranges move, the process invokes the
Poisson Process whereby "new dishes" (market ranges) are introduces as
clusters of data within the larger time series of trading.
Moreover, because trading is an active process, whereby one can buy,
as quickly as he, or she may sell, we also invoke "exchangeability" within
the larger concepts of measuring density and intensity within the cluster
movements (known as the "hierarchies of Beta Processes.)
As a quick, though loose example, assuming we have two days of
market data, measured in clusters, or distributions, we are able to infer the
first of the two days as our base measure of data. The second day allows
that trades can take place at the same data points; much like the motion of
atoms. Because the data sets are disjoint, our goal is to create an inferential
algorithm for the clusters that have been created within the market. In

Mark Whistler • Volatility Illuminated • Page 328 of 363

other words, by quantifying subset distributions, we are able to create
probability modeling for movement within markets, major pivot points
within ranges, and potential intensity of breakouts and
breakdowns…when the distributions shift.
While market data is not truly a "nested clustering problem" as known
in the Dirichlet Process, the conceptual framework behind the data sets
remains the same. However, by categorizing hierarchies of clusters, we
are able to create 'classes' of probable movements and outcomes
potentially about to unfold.
At this point, we find ourselves at the measurement of variance an
Integer Attributable Models, or our Inference Algorithms of market
movement. Using Levy Measures, the author concludes that we may be
able to find rare occurrences of data within the cluster data sets, which
derive probability of, and into, movement.
Accordingly, we evolve our Levy Process thinking to Gamma
Processes, whereby we are able to begin seeking 'jump probability.'
In 2004, David Applebaum wrote that the gamma process can be
written as Γ(t;γ,λ), it is a pure-jump increasing Levy process with intensity
measure ν(x) = γx − 1exp( − λx), for positive x.
Because the Gamma Process may be measured in terms of the mean (μ)
and variance (v) per unit time, we find market action unfolding as:
γ = μ2 / v and λ = μ / v.
Conceptually, while we would like to measure the movement of the
mean, the author's recent research is instead focuses on the rarity of data
clusters, and or possibility of standard deviations actually surfacing not as
larger points of regression, but instead, the precise points where ranges
shift, or 'jump.'
Within currency markets, by measuring the clusters in terms of omega
(time) in terms of each market as linear, we may derive that density both
implies probable intensity of jump and capacity of range 'locking' at the
same time.

Mark Whistler • Volatility Illuminated • Page 329 of 363

 To date, the author has spent considerable time with a team in China
creating code to locate the clusters of data, which is now complete. We are
now applying jump-probability via the Beta process, while also seeking to
attempt to find volatility and probability of movement, or not, within the
cluster subsets of market action.
All of the aforementioned –again- serves as a hopeful 'jump point' to
open further discussion of the movement of subset distributions within
financial markets, as one of the larger clues to the seemingly random
prices surfacing day-after-day and year-after-year.

In the end, the larger principals behind Volatility Illuminated and the
possibilities of…reside more in challenging traditional paradigms, with the
hope retail traders will begin thinking of price action more in terms of
physics and quantitative-statistics, over historical methods of mere
'technicals-based' buying and selling.
One would think that as all things in this universe hold energy and
matter, price action, if even seen as a derivative of human emotion, would
hold some of the same attributes.
With all that I have mentioned, I would like to politely challenge
readers to reshape conventional views on market and trading action from
that of 'the old standards' of technical and fundamental analysis, to 'the new
standard' of the expansion and compression of energy as seen through
volatility, probability and the movement of subset distributions.

Mark Whistler • Volatility Illuminated • Page 330 of 363

 Rules of
TRADING DISCIPLINE
1. NEVER OVER-LEVERAGE
2. Know the Economics.
Do not place a trade if you don't understand why the trade is being made.
3. NEVER EVER leave a position unattended without some sort of stop in
place.
4. NEVER OVER-LEVERAGE
You will compromise your account by taking on a position that is too large
to think clearly.
5. When in Doubt Get Out.
If you can't sleep at night, get out of the trade.
Trust your instincts.
6. Missed Money is Better than Lost Money.
If you have a negative gut feeling about a trade
setup, stay out. There will always be opportunity to make money, but not
if you don't have any.
7. Send the Trade Away, Live to Trade Another Day. If it doesn't look, or
feel right, get out.
8. The First Loss is Always the Smallest Loss.
It's hard to take a loss, I know, I've taken plenty of them. I can tell you
firsthand, you will save a ton of money by taking the first loss - at your
predetermined stop - rather than letting your emotions keep you in a
position.
Stop losses are a critical rule of money management.

Mark Whistler • Volatility Illuminated • Page 331 of 363

9. Little Loss… Little Loss… HUGE WIN.
We must understand that there will be losses in trading.
We will accept small losses, even if there are a string of them, knowing that
a big win is on the way.
We will never take a large loss by violating out stops, because doing so,
would void the trading plan we are working so hard to execute.
If you think small, you will get small.
Traders who constantly take little winners off the table eventually blow
up.
10. Lazy is Crazy.
At every turn, we will work hard to improve our trading knowledge by
reading and studying everything we can.

Mark Whistler • Volatility Illuminated • Page 332 of 363

 Six CORE PRINCIPLES
OF TECHNICAL ANALYSIS
Charting, like all technical analysis, must be understood for what it is.
The core principals to understanding what technical analysis is and why it
is important are:

1. Charting and technical analysis are lagging indicators, meaning that

they display information about an event that has already occurred.

2. Using technical analysis alone, without regard to fundamentals, or

news…is lazy, and will often cause losses.

3. Technical analysis should be used as a "beacon in the night", signaling

that an event, or shift (fundamental, or news-oriented) within the market,
or stock has occurred.

4. Often, technical analysis relies on 'self fulfilling prophecies', meaning

that many people must be watching, believe in, and act on the same data
for signals to become accurate.

5. There is no 'secret code' to markets. Some technical signals work better

than others do, but none will work "all of the time."

6. Traders who utilize technical analysis (while also paying attention to

fundamentals and news too), but fail to remember simple 'common sense',
will eventually get killed.

A deep understanding of the above principals is vital to trading with

technical analysis. One must understand technicals for what they are, while
keeping a clear head as signals come about on a day-to-day basis.

In the end, common sense is king.

Mark Whistler • Volatility Illuminated • Page 333 of 363

 Additional DISCLAIMER
Mark Whistler, fxVolatility, WallStreetRockStar.com and
2034thecorporation.com ("Company") is not an investment advisory
service, nor a registered investment advisor or broker-dealer and does not
purport to tell or suggest which securities or currencies customers should
buy or sell for themselves. The analysts and employees or affiliates of
Company may hold positions in the stocks, currencies or industries
discussed here. You understand and acknowledge that there is a very high
degree of risk involved in trading securities and/or currencies. The
Company, the authors, the publisher, and all affiliates of Company assume
no responsibility or liability for your trading and investment results.
Factual statements on the Company's website, or in its publications, are
made as of the date stated and are subject to change without notice.
It should not be assumed that the methods, techniques, or indicators
presented in these products will be profitable or that they will not result in
losses. Past results of any individual trader or trading system published by
Company are not indicative of future returns by that trader or system, and
are not indicative of future returns which be realized by you. In addition,
the indicators, strategies, columns, articles and all other features of
Company's products (collectively, the "Information") are provided for
informational and educational purposes only and should not be construed
as investment advice. Examples presented on Company's website are for
educational purposes only. Such set-ups are not solicitations of any order
to buy or sell. Accordingly, you should not rely solely on the Information
in making any investment. Rather, you should use the Information only as
a starting point for doing additional independent research in order to
allow you to form your own opinion regarding investments. You should
always check with your licensed financial advisor and tax advisor to
determine the suitability of any investment.
Mark Whistler • Volatility Illuminated • Page 334 of 363
 Custom Indicator
Code I
WAVE ● PM
Copyright © Mark Whistler 2009 / fxVolatility.com.

//+--------------------------------------------------+
//|Whistler Active Volatility Energy - Price Mass |
//| Price Mass WAVE-PM |
//| Copyright 2009, fxVolatility.com |
//| Authors: Mark Whistler/EcTrader.net |
//| [email protected] |
//|www.WallStreetRockStar.com|www.fxVolatility.com. |
//+--------------------------------------------------+
#property copyright "Copyright 2009, Mark Whistler"
#property link "http://www.wallstreetrockstar.com"

#property indicator_separate_window
#property indicator_buffers 6
#property indicator_maximum 1
#property indicator_minimum 0
#property indicator_color5 Blue
#property indicator_color6 Red

//---- indicator parameters

extern int ShortBandsPeriod=14;
extern int ShortBandsShift=0;
extern double ShortBandsDeviations=2.2;
extern int LongBandsPeriod=55;
extern int LongBandsShift=0;
extern double LongBandsDeviations=2.2;
extern int PERIODS_CHARACTERISTIC=100;
//---- buffers
double ShortMovingBuffer[];
double LongMovingBuffer[];
double ShortDev[];
double LongDev[];
double Shortoscillator[];
double Longoscillator[];
//+---------------------------------------------------+

Mark Whistler • Volatility Illuminated • Page 335 of 363

//| Custom indicator initialization function |
//+---------------------------------------------------+
int init()
{
//---- indicators
SetIndexStyle(0,DRAW_NONE);
SetIndexBuffer(0,ShortMovingBuffer);
SetIndexStyle(1,DRAW_NONE);
SetIndexBuffer(1,LongMovingBuffer);
SetIndexStyle(2,DRAW_NONE);
SetIndexBuffer(2,ShortDev);
SetIndexStyle(3,DRAW_NONE);
SetIndexBuffer(3,LongDev);
SetIndexStyle(4,DRAW_LINE);
SetIndexBuffer(4,Shortoscillator);
SetIndexStyle(5,DRAW_LINE);
SetIndexBuffer(5,Longoscillator);
//----
SetIndexDrawBegin(0,ShortBandsPeriod+ShortBandsShift);
SetIndexDrawBegin(1,LongBandsPeriod+LongBandsShift);
SetIndexDrawBegin(2,ShortBandsPeriod+ShortBandsShift);
SetIndexDrawBegin(3,LongBandsPeriod+LongBandsShift);
SetIndexDrawBegin(4,ShortBandsPeriod+ShortBandsShift);
SetIndexDrawBegin(5,LongBandsPeriod+LongBandsShift);
//----
return(0);
}
//+---------------------------------------------------+
//| Bollinger Bands |
//+---------------------------------------------------+

int start()
{
int i,k,counted_bars=IndicatorCounted();
double deviation;
double sum,oldval,newres;
//----
if(Bars<=LongBandsPeriod) return(0);
//---- initial zero
if(counted_bars<1)
{
for(i=1;i<=ShortBandsPeriod;i++)
{
ShortMovingBuffer[Bars-i]=EMPTY_VALUE;
}
for(i=1;i<=LongBandsPeriod;i++)
{
LongMovingBuffer[Bars-i]=EMPTY_VALUE;
}
}
//----
int limit=Bars-counted_bars;
if(counted_bars>0) limit++;
for(i=0; i<limit; i++)
{

Mark Whistler • Volatility Illuminated • Page 336 of 363

ShortMovingBuffer[i]=iMA(NULL,0,ShortBandsPeriod,ShortBandsShift,MODE_SMA,PRICE
_CLOSE,i);

LongMovingBuffer[i]=iMA(NULL,0,LongBandsPeriod,LongBandsShift,MODE_SMA,PRICE_CL
OSE,i);
}
//----
i=Bars-ShortBandsPeriod+1;
if(counted_bars>ShortBandsPeriod-1) i=Bars-counted_bars-1;
while(i>=0)
{
sum=0.0;
k=i+ShortBandsPeriod-1;
oldval=ShortMovingBuffer[i];
while(k>=i)
{
newres=Close[k]-oldval;
sum+=newres*newres;
k--;
}
ShortDev[i]=ShortBandsDeviations*MathSqrt(sum/ShortBandsPeriod);
Shortoscillator[i]=OscillatorLine(ShortDev,i);
//UpperBuffer[i]=oldval+deviation;
//LowerBuffer[i]=oldval-deviation;
i--;
}
//----
i=Bars-LongBandsPeriod+1;
if(counted_bars>LongBandsPeriod-1) i=Bars-counted_bars-1;
while(i>=0)
{
sum=0.0;
k=i+LongBandsPeriod-1;
oldval=LongMovingBuffer[i];
while(k>=i)
{
newres=Close[k]-oldval;
sum+=newres*newres;
k--;
}
LongDev[i]=LongBandsDeviations*MathSqrt(sum/LongBandsPeriod);
Longoscillator[i]=OscillatorLine(LongDev,i);
//UpperBuffer[i]=oldval+deviation;
//LowerBuffer[i]=oldval-deviation;
i--;
}
//----
return(0);
}

double OscillatorLine(double indicator[], int StartBar)

{
double S=0;
int ArrayLong=PERIODS_CHARACTERISTIC;

Mark Whistler • Volatility Illuminated • Page 337 of 363

 double Result;
for(int j=StartBar;j<ArrayLong+StartBar;j++)
{S+=MathPow((indicator[j]/Point),2);}

S/=ArrayLong;
S=MathSqrt(S)*Point;
if(S!=0)
{Result=indicator[StartBar]/S;}
Result=MathTanh(Result);
return (Result);
}
double MathTanh(double x)
{
double exp;
double returnNum;
if(x>0)
{
exp=MathExp(-2*x);
returnNum= (1-exp)/(1+exp);
return (returnNum);
}
else
{
exp=MathExp(2*x);
returnNum=(exp-1)/(1+exp);
return (returnNum);
}
}

Mark Whistler • Volatility Illuminated • Page 338 of 363

 Custom Indicator
Code II
Duel CCI with Signal

Copyright © Mark Whistler 2009 / fxVolatility.com.

//+--------------------------------------------------+
//| Duel CCI w/Signal |
//| Copyright 2009, fxVolatility.com |
//| Authors: Mark Whistler/EcTrader.net |
//| [email protected] |
//|www.WallStreetRockStar.com|www.fxVolatility.com. |
//+--------------------------------------------------+
#property copyright "Copyright 2009, Mark Whistler"
#property link "http://www.wallstreetrockstar.com"

#property indicator_separate_window
#property indicator_buffers 4
#property indicator_color1 SteelBlue
#property indicator_color2 Red
#property indicator_color3 OrangeRed
#property indicator_width3 2
#property indicator_color4 MediumSpringGreen
#property indicator_width4 2
//---- input parameters
extern int CCIPeriod1 = 14;
extern int CCIPeriod2 = 100;
extern int Num_CountBarOf220To64=10000;
extern int Num_Bigger=220;
extern int Num_Smaller=64;
int count;
//---- buffers
double CCIBuffer1[];

Mark Whistler • Volatility Illuminated • Page 339 of 363

double CCIBuffer2[];
double CCIArrow1[];
double CCIArrow2[];

//+---------------------------------------------------+
//| Begin Custom Indicator |
//+---------------------------------------------------+

int deinit()
{
//ObjectsDeleteAll();
return(0);
}
int init()
{
string short_name;
//---- indicator line
SetIndexStyle(0, DRAW_LINE, STYLE_SOLID, 1, SteelBlue);
SetIndexStyle(1, DRAW_LINE);
SetIndexStyle(2,DRAW_ARROW);
SetIndexStyle(3,DRAW_ARROW);
SetIndexBuffer(0, CCIBuffer1);
SetIndexBuffer(1, CCIBuffer2);
SetIndexBuffer(2, CCIArrow1);
SetIndexBuffer(3, CCIArrow2);
SetIndexArrow(2,234);
SetIndexArrow(3,233);
//---- name for DataWindow and indicator subwindow label
short_name = "CCIW(" + CCIPeriod1 + ", " + CCIPeriod2 + ")";
IndicatorShortName(short_name);
SetIndexLabel(0, "CCIW(" + CCIPeriod1 + ")");

SetIndexLabel(1, "CCIW(" + CCIPeriod2 + ")");

SetIndexLabel(2, "CCIW(" + "CCIArrow1" + ")");
SetIndexLabel(3, "CCIW(" + "CCIArrow2" + ")");
//----
SetIndexDrawBegin(0, CCIPeriod1);
SetIndexDrawBegin(1, CCIPeriod2);
SetIndexDrawBegin(2, CCIArrow1);
SetIndexDrawBegin(3, CCIArrow2);
//----
return(0);
}

//+---------------------------------------------------+
//| CCI |
//+---------------------------------------------------+

Mark Whistler • Volatility Illuminated • Page 340 of 363

int start()
{
int i, counted_bars = IndicatorCounted();
//----
if(Bars <= CCIPeriod1)
return(0);
//---- initial zero
if(counted_bars < 1)
for(i = 1; i <= CCIPeriod1; i++)
CCIBuffer1[Bars-i] = 0.0;
//----
i = Bars - CCIPeriod1 - 1;
if(counted_bars >= CCIPeriod1)
i = Bars - counted_bars - 1;
bool success1=false;
bool success2=false;
int j=1;
while(i >= 0)
{
CCIBuffer1[i] = iCCI(NULL, 0, CCIPeriod1, PRICE_TYPICAL, i);
CCIBuffer2[i] = iCCI(NULL, 0, CCIPeriod2, PRICE_TYPICAL, i);
if (CCIBuffer2[i]<=Num_Smaller &&

CCIBuffer2[i+1]>=Num_Smaller)
{
for (j=1; j<=Num_CountBarOf220To64; j++)
{
if (CCIBuffer2[j+i]<Num_Smaller)
{
success1=false;
break;
}
if (CCIBuffer2[j+i]>=Num_Bigger)
{
success1=true;
break;
}
}//}
if (success1==true)
{
CCIArrow1[i]=CCIBuffer2[i];
count++;
success1=false;
}
else
{
CCIArrow1[i]=EMPTY_VALUE;
}
}

Mark Whistler • Volatility Illuminated • Page 341 of 363

 //-----------------------------

if (CCIBuffer2[i]>=(-1*Num_Smaller) && CCIBuffer2[i+1]<=(-

1*Num_Smaller))
{
for (j=1; j<=Num_CountBarOf220To64; j++)
{
if (CCIBuffer2[j+i]>(-1*Num_Smaller))
{
success2=false;
break;
}
if (CCIBuffer2[j+i]<=(-1*Num_Bigger))
{
success2=true;
break;
}
}//}
if (success2==true)
{
CCIArrow2[i]=CCIBuffer2[i];
success2=false;
}
else
{
CCIArrow2[i]=EMPTY_VALUE;
}
}
success1=false;
success2=false;
i--;
}

return(0);
}

Mark Whistler • Volatility Illuminated • Page 342 of 363

 Custom Indicator
Code III
WVAV

Copyright © Mark Whistler 2009 / fxVolatility.com.

//+--------------------------------------------------+
//|Whistler Volume Adjusted Volatility - WVAV |
//| |
//| Copyright 2009, fxVolatility.com |
//| Authors: Mark Whistler/EcTrader.net |
//| [email protected] |
//|www.WallStreetRockStar.com|www.fxVolatility.com. |
//+--------------------------------------------------+
#property copyright "Copyright 2009, Mark Whistler"
#property link "http://www.wallstreetrockstar.com"

//----
#property indicator_chart_window
#property indicator_buffers 5
#property indicator_color1 Red
#property indicator_color2 DarkGoldenrod
#property indicator_color3 Black

#property indicator_color4 Black

#property indicator_color5 Black

//---- input parameters

extern int MA_Ticks = 10000;
extern int MA_Shift = 0;
extern int MA_Start = 500;
//---- indicator parameters1
extern string aa="*****************************";
//---- indicator parameters

Mark Whistler • Volatility Illuminated • Page 343 of 363

extern bool MidBandVisible=false;
extern int BandsPeriod=14;
extern int BandsShift=0;
extern double BandsDeviations=3.2;

//---- indicator buffers

double ExtMapBuffer[];
double ExpVolBuffer[];
//---- buffers
//---- double MovingBuffer[];
double UpperBuffer[];
double LowerBuffer[];
//--------------

//+---------------------------------------------------+
//|Custom Indicator Initialization |
//+---------------------------------------------------+

int init()
{
//----
SetIndexStyle(0, DRAW_LINE);
SetIndexShift(0, MA_Shift);
//---- indicator buffers mapping
SetIndexBuffer(0, ExtMapBuffer);
SetIndexStyle(1, DRAW_NONE);
SetIndexBuffer(1, ExpVolBuffer);
SetIndexDrawBegin(0, 0);
//---- initialization done
//---- indicators
SetIndexStyle(2,DRAW_LINE);
SetIndexBuffer(2,ExtMapBuffer);
SetIndexStyle(3,DRAW_LINE);
SetIndexBuffer(3,UpperBuffer);
SetIndexStyle(4,DRAW_LINE);
SetIndexBuffer(4,LowerBuffer);

//----
SetIndexDrawBegin(2,BandsPeriod+BandsShift);
SetIndexDrawBegin(3,BandsPeriod+BandsShift);
SetIndexDrawBegin(4,BandsPeriod+BandsShift);
return(0);
}

//+---------------------------------------------------+
//|Custom Indicator Initialization |
//+---------------------------------------------------+

int start()
{

Mark Whistler • Volatility Illuminated • Page 344 of 363

 int counted_bars = IndicatorCounted();
int rest = Bars - counted_bars;
int restt = Bars - counted_bars;
double sumVol;
int ts;
int evol;
int volsum;
int j;
int i;

//---------------Begin Add MA-----------------------

double deviation;
double sum, oldval,newres;
//----
if(Bars<=BandsPeriod) return(0);
//---- initial zero
if(counted_bars<1)
for(i=1;i<=BandsPeriod;i++)
{
ExtMapBuffer[Bars-i]=EMPTY_VALUE;
UpperBuffer[Bars-i]=EMPTY_VALUE;
LowerBuffer[Bars-i]=EMPTY_VALUE;
}

int limit=Bars-counted_bars;
if(counted_bars>0) limit++;
for(i=0; i<limit; i++)
{

ExtMapBuffer[i]=iMA(NULL,0,BandsPeriod,BandsShift,MODE_SMA,PRICE_CLOSE,i);
}

//---------------End Add MA-----------------------

//---------Begin Volume MA--------------------------

while(restt >= 0)
{
volsum = 0;
for(int k = 0; k < 30; k++)
volsum += iVolume(NULL, 0, restt + k*24);
ExpVolBuffer[restt] = volsum / 30;
restt--;
}
//----
while(ExpVolBuffer[rest] == 0 && rest >= 0)
rest--;
rest -= MA_Ticks / 200;
if(rest > MA_Start)

Mark Whistler • Volatility Illuminated • Page 345 of 363

 rest = MA_Start;
//----
while(rest >= 0)
{
sumVol = 0;
ts = 0;
j = rest;
while(ts < MA_Ticks)
{
evol = ExpVolBuffer[j];
//---- Print("Evol = ", evol);
if(ts + evol < MA_Ticks)
{
sumVol += evol * Open[j];
ts += evol;
}
else
{
sumVol += (MA_Ticks - ts) * Open[j];
ts = MA_Ticks;
}
j++;
}
ExtMapBuffer[rest] = sumVol / MA_Ticks;
rest--;
}

//----------------------End Volume MA-----------------

//---------------------Begin Bollinger Band-----------

//----

i=Bars-BandsPeriod+1;
if(counted_bars>BandsPeriod-1) i=Bars-counted_bars-1;
while(i>=0)
{
sum=0.0;
k=i+BandsPeriod-1;
oldval=ExtMapBuffer[i];
while(k>=i)
{
newres=Close[k]-oldval;
sum+=newres*newres;
k--;
}
deviation=BandsDeviations*MathSqrt(sum/BandsPeriod);
UpperBuffer[i]=oldval+deviation;
LowerBuffer[i]=oldval-deviation;
i--;
}
//----
//-----------------------End Band---------------------
//----
return(0);
}

Mark Whistler • Volatility Illuminated • Page 346 of 363

Bibliography / Recommended
Reading
Recommended Reading: Statistics
• Best, Joel (2001). Damned Lies and Statistics: Untangling Numbers from the Media,
Politicians, and Activists. University of California Press. ISBN 0-520-21978-3.
• Desrosières, Alain (2004). The Politics of Large Numbers: A History of Statistical
Reasoning. Trans. Camille Naish. Harvard University Press. ISBN 0-674-68932-1.
• Hacking, Ian (1990). The Taming of Chance. Cambridge University Press. ISBN 0-
521-38884-8.
• Lindley, D.V. (1985). Making Decisions (2nd ed. ed.). John Wiley & Sons. ISBN 0-
471-90808-8.
• Tijms, Henk (2004). Understanding Probability: Chance Rules in Everyday life.
Cambridge University Press. ISBN 0-521-83329-9.

Recommended Reading: DotCom Bubble

• Cassidy, John. Dot.con: How America Lost its Mind and Its Money in the Internet
Era (2002)
• Daisey, Mike. 21 Dog Years Free Press. ISBN 0-7432-2580-5.
• Goldfarb, Brent D., Kirsch, David and Miller, David A., "Was There Too Little
Entry During the Dot Com Era?" (April 24, 2006). Robert H. Smith School Research
Paper No. RHS 06-029 Available at SSRN: http://ssrn.com/abstract=899100
• Kindleberger, Charles P., Manias, Panics, and Crashes: A History of Financial
Crises (Wiley, 2005, 5th edition)
• Kuo, David dot.bomb: My Days and Nights at an Internet Goliath ISBN 0-316-
60005-9 (2001)
• Lowenstein, Roger. Origins of the Crash: The Great Bubble and Its Undoing.
(Penguin Books, 2004) ISBN 0-14-303467-7

Recommended Reading: Algorithmic Trading

• MTS to mull bond access, The Wall Street Journal Europe, April 18, 2007, p. 21
• Sornette (2003): Critical Market Crashes, Sornette (2003): Critical Market Crashes
• Trading with the help of 'guerrillas' and 'snipers,' Financial Times, March 19, 2007

Mark Whistler • Volatility Illuminated • Page 347 of 363

• Rob Curren, Watch Out for Sharks in Dark Pools, The Wall Street Journal, August
19, 2008, p. c5. Available at WSJ Blogs
• Artificial intelligence applied heavily to picking stocks by Charles Duhigg,
November 23, 2006
• Carney, John (June 26, 2009). "UBS Accuses Three Quant Traders Of Stealing Its
Secret Code". The Business Insider. http://www.businessinsider.com/ubs-
accuses-three-quant-traders-of-stealing-its-secret-code-2009-6. Retrieved on July
14, 2009.

Mark Whistler • Volatility Illuminated • Page 348 of 363

 End Notes

1Richard S. Newman, Transformation of American abolitionism: fighting slavery in the early Republic
chapter 1
2Results from the 1860 Census: The Civil War Home Page. Civil-War.net. Accessed: June 2009.
http://www.civil-war.net/about_us.asp
3 Remembering 1975 – The Majority was Wrong – The Good News Economist. December 11, 2008.

Accessed June, 2009.

http://mast-economy.blogspot.com/2008/12/remembering-1975-majority-was-wrong.html
4Buffet, Warren. Buy American. I am. October 16, 2008. The New York Times.
http://www.nytimes.com/2008/10/17/opinion/17buffett.html
5
Loftus, Elizabeth F. Make-believe memories," American Psychologist (November 2003).
6
Cozens, Claire. Ads Can Alter Memory Claim Scientists. UK Guardian. September 4, 2001.
http://www.guardian.co.uk/media/2001/sep/04/advertising
7
"Make my Memory" in Psychology & Marketing (2002)
8
Stewart's Beverages - Then & Again!
http://www.drinkstewarts.com/history.aspx
9
Dot-com bubble. (2009, June 6). In Wikipedia, The Free Encyclopedia. Retrieved 23:16, June 6,
2009, from http://en.wikipedia.org/w/index.php?title=Dot-com_bubble&oldid=294871219
10
Wolff, Michael Dot-Com Bomb. New York Magazine. Published Apr 24, 2000.
http://nymag.com/nymetro/news/media/columns/medialife/2978/
11
Connors, E., Lundregan, T., Miller, N. & McEwan, T. Convicted by Juries, Exonerated by
Science: Case Studies in the Use of DNA Evidence to Establish
Innocence After Trial (National Institute of Justice, Alexandria, Virginia, 1996).
12
Loftus, Elizabeth F. "Our changeable memories: legal and practical implications," in Nature
Reviews: Neuroscience (2003).

Mark Whistler • Volatility Illuminated • Page 349 of 363

13
Loftus, Elizabeth F. "Memory Faults and Fixes" in Issues in Science & Technology (2002;
publication of the National Academies of Science)
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Loftus, Elizabeth F. "Memory Faults and Fixes" in Issues in Science & Technology (2002;
publication of the National Academies of Science)
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Injuries in Athletics: Causes and Consequences Slobounov, Semyon 2008, XV, 544 p. 39 illus.,
4 in color., Hardcover ISBN: 978-0-387-72576-5
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Conspiracy Against Rights .S. Federal Government, U.S. Department of Justice.
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Loftus, Elizabeth F. Make-believe memories," American Psychologist (November 2003).
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Greg Sandoval Start-up with pricey Super Bowl ad goes bust
Staff Writer, CNET News June 14, 2000 2:00 PM PDT
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Loftus, Elizabeth F. Make-believe memories," American Psychologist (November 2003).
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Creative Research Systems: Sample Size Calculator. Accessed: May 2009.
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An Overview of The Study of Economics Principles, Concepts & Applications - The Study of
Economics is a new concept in learning Economics. Accessed: May 2009.
The McGraw-Hill Companies. http://www.dushkin.com/connectext/econ/help.mhtml Accessed:
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Assets and Liabilities of Commercial Banks in the United Seasonally
adjusted http://www.federalreserve.gov/releases/h8/Current/
26Ecnonomy.com. U.S. Crisis Response. June, 2009.
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Gorard, Stephen. Revisiting a 90-year-old debate: the advantages of the mean deviation.
Department of Educational Studies, University of York. Paper presented at the British
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Elementary Statistics – by Mario F. Triola, Eighth Edition DEFININITIONS, RULES AND
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37, No. 4 (Winter, 1973-1974), pp. 625-627 (article consists of 3 pages) Published by: Oxford
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distribution again? And what has a fat tail? The graph in Figure 9.2 illustrates the concept
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is a distribution like the stock market's, less small changes than one would expect and more
large changes. The amount of difference between the two humps is known as kurtosis and it is
a significant quantity for stocks."
American Educational Research Association, American Psychological Association, & National
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48Bollinger Bands. Definition: InvestorWords.com. Accessed: May 2009.
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A dynamical model describing stock market price distributions, Jaume Masoliver, Miquel
Monteroa and Josep M. Porràa, b. Departament de Física Fonamental, Universitat de Barcelona,
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