The “Hunt Volatility Funnel” (HVF)

theory (part 2/2). By Alvaro Rivero

The market creates a set of criteria (levels prior to an event) and then distinctly moves
in a manner that says: “Right, I’m about ready to take serious direction in the following
way”. This is the big unspoken key aspect that is unique to the Hunt Volatility Funnel
theory.

The HVF concept “key levels of significance (KLOS)” goes beyond just support and
resistance, the traditionally wellknown element of horizontal levels in technical analysis.

Key points:

– Why to trade the “breakout way”?

The clearest result of a good breakout strategy is to gain a substantial return very fast;
In other words, big moves in your favour in a short period of time, and the benefit of this
is that you’re in the market only for that period.

Here comes the law of market geometry: “For every action there’s an equal and
opposite reaction”.

Remember that the same participants are usually in the market every day, and the big
players determine the market size using the same amount of leverage; When they go
oversold and they overbuy, that’s usually the scale to which they will overreact to the
opposite direction (they have to get out of those same leveraged position).

i.e:

– Volume

It can precede, in many instances, key moves.

We should start to use one of the genuine value indicators in volume, which is a set of
data and not price crunched in a mass formula (the On Balance Volume indicator).

i.e:

– Getting the news before the news

Often, the breakout is supported by fundamental news.

Obviously you don’t know that news, so you get to trade it and find it out later (kind of
getting to move with the insiders and the “big money”).

Quite often, by the time it’s well exposed and documented (the news), the main part of
the move has already occurred and that’s usually when the smart money is taking
some of its profits (invariably it uses the power of patterns).

There is always a natural geometry that is created by charts; In other words, there must
become imbalance in the supply and demand, whether it is for a newsbased reason or
for some reason as yet undisclosed to you, but if it’s deemed that the previous price
behaviour is in relevance to a level and it is overcome, then there is a great opportunity
for a trade.

That’s what we will do in our macro timeframe and then ensure that our base setup is
tying that in. We want that trigger entry level (needs to be a pending order) as we are
waiting for the key event, for the market to tell us when we should be trading (we let the
market take us in).

i.e:

Inverted HVF on Gulf Sands Petroleum> We called this way back in 2013 prior to the oil
collapse and the war in Syria, and it was the epitome of news before the news (and
contrary to a number of newsletter circulars recommending it as a buy):
– Tight, but not so tight that it suffocates you

Tight stop-losses kill good trades.

The key value of this is the financial mathematics of trading and the risk-reward ratio;
The tighter the stop loss with the same reward the better the risk-reward ratio, but if we
got tighter, we shouldn’t trade bigger size.

i.e:

– Positive slippage

Due to I’m buying what everyone else is selling, and if it gaps, I get out even higher than
I plan.

People who are selling what everyone else is selling, they get negative fulfillment
slippage, and we will benefit from their herd response, by being on the other side.

i.e:
HVF stages:

– Stage 1: The feign & break

Here we drip (the first run).

It always tests the level (sensitive one), breaks through it almost like an electric fence
and has a little pop-up above it.

– Stage 2: The second chance

Here you could grab new shorts/longs if you miss the trade at the beginning.

– Stage 3: The capitulation

This is where the market runs (big move) and you just start making profit.

Total imbalance in supply and demand with no bias to be found.

– Stage 4: Weak buying overcome

Some buyers saying: “Surely, it’s going too far…let’s get in”, but is still a capitulation on,
and the target has to be made.

Key at this interim level and how this ties in.

– Stage 5: Counterattack & progress decay

Now you’re out on the strength and one of the strong buy/sell of bars are back into a
buying/selling frenzy.

Here the trade is closed and the likelihood is you weren’t even watching it (take-profit
pending order)
Two 5 stages examples:

Hey guys!

In this post I'm going to discuss the trading method I have been using for the
past couple of months. When I first saw it, it seemed really confusing and
almost "made up". At the same time, I believe it is vital for you to have at least a
small grasp of how HVF Theory works so you can understand my other posts
better.

There are several ways to look at a chart. Besides the multitude of indicators
one could use, there are also the so called classical chart patterns that you could
look for; and that is the way most people trade. However, what about the actual
price action? Is it actually random?

Well, this is statement that traders using HVF Theory would usually disagree
with. There is a lot of information that you could take from a chart if you knew
how to look at it, in the correct way.
As you can observe in the figure above, you can see a setup which is a HVF. A
regular HVF contains three high points and three low points, leading to an
eventually tightening of the price behavior; a reduction in volatility. We first
have a big impulse from the 1H to 1L points and then a smaller one from 2H to
2L.

Eventually the price action calms down so much that we are able to draw the
green and red lines (3H and 3L points, respectively). This zone is referred to
the funnel region . Once this levels have been established, if we join the lines
we indeed a type of funnel forming as a result of the decrease in the price
volatility until it make a sudden decision to go in a given direction.

This process can also be applied when the price is seemingly going down as
seen in the picture below:

Very similarly we see a reduction in volatility until the price continues moving
downwards.

KEEP ON KEEPING ON