The volatility expansion trading strategy, as its name suggests, is based on sudden changes of volatility in the price of a trading asset. This strategy usually uses short-term trades. Normally these short-term trades are characterized by a high winning percentage but will provide relatively low profits every trade. Traders that use volatility expansion strategies
are out of the market a significant percentage of the time, until they find a rapid change in the volatility.
Volatility expansion often uses gaps. Gaps are the places where there is no continuity in the price of a tradable asset; in other words, it could be said that where the price of one bar is higher than the high or lower than that low of the previous bar. The concept behind volatility expansion is assuming that if there is a gap, a sudden change in volatility, going
upwards, the market will continue to go up and if it gaps down the market will continue to go down.
Volatility expansion gaps
There are many different ways to apply volatility expansion strategies to a trading system. Depending on the trading personality, the parameters need to be set in order to determine the entry and exit points. In volatility expansion systems, the gaps determine the entry points. The timeframe of the gap periods as well as the exits need to be defined by the
trader according to his objectives. Since this strategy has a high percentage of winning trades but the profits are usually low per every trade, this trading strategy can be more profitable when combined with other strategies to obtain a stronger trading system.