I believe the “margin of error” is important when analyzing swings, as in the current case the stock is up $20,000. The stock price is trading at $3 and is $100 short the previous trading day. The margin of error is the current price-stock’s average daily volume.
You can use the following two indicators to determine the margin of error:
The average daily volume per tick. The volatility index (VIX). The daily closing price.
1. Daily volume, in the case of the VIX, is a simple equation:
VIX = (daily volume) X (spread), where:
Daily volume can be calculated on any day
X means the average (over a given day)
The volatility index is a daily volatility measure which is calculated as below:
VIX = (Daily VIX)/(daily volatility index), where: 1
The Spread is the difference in daily open and close rates between the current day’s price and the previous day’s price. This provides a measure of spread of the market.
Example: The volatility of the stock is 10 per cent and the current date is Jan 8. The daily volatility index is 50 points and the daily closing price is $3.20. If there is a daily spread of 10 per cent (100 points) it means that the market has a daily volatility of 10 per cent. If the market has a spread of 1 per cent (10 per cent), the volatility is 50 (100 per cent).
2. The daily closing price is $3.01 on 10th Jan 2016, the stock is trading at $3.20.
What should the stock market do in this case?
This indicator is an important one, the stock should either go up (down) or stay the same. If it stays the same, then I believe the company’s investors should not want to sell.
The stock should probably trade up, as the volatility index suggests (it is not as big as the VIX) and if it goes down then the market should be willing to buy it, just so that the price will remain above the VIX value.
This is just an example to demonstrate that it is a very important indicator, as in this case the stock traded up but then went down and is now at $3.25, which is now a good amount below the lower end (which is a positive) of volatility.
That
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