Tastylive: Predict Market Volatility With 74% Accuracy Using this Key Metric

Traders rely on statistics for making short-term decisions. While markets can sometimes deviate from those statistics, it creates a reliable and repeatable base from which to enter and exit trades.

Most options pricing is based around the Black-Scholes model. This model relies on a normal distribution, otherwise known as a bell curve. Returns tend to be centered around a mean, and market extremes are rare. However, during periods of volatility, what’s rare becomes common.

To offset the normal distribution model that works during calm conditions, other data is needed. One tool that can be used is the Quantile-quantile (Q-Q) plots. These tools compare two probability distributions.

The result? It can help visualize whether the market is in a normal situation or a stressed one. In the latter case, using the Black-Scholes model may not be appropriate. It could mean getting into trades that have a much poorer risk-reward ratio than during calm times.

This metric can be used to better predict overall market volatility, with a 74% track record. Avoiding normal trading patterns when the market is starting to behave abnormally is huge.

It can mean avoiding investments that appear safe but are risky. And it can mean a better time to employ trades suited for more market volatility and chaos.

For more details on Q-Q plots and adjusting your trading during market volatility, click here.