When I hear other traders mention statistics on a market, I always do the research myself, before I use that trading statistic, as it gives me confidence in the stat and also a better understanding of what makes the stat tick, which then helps me implement into my live trading.
The trading statistic I have heard a couple of times over the past week or so, from a trading buddy, was how often is the previous day’s high or low is broken, or how uncommon an inside day is, and the effect that volatility has on this stat, i.e. that an inside day is less common (the high or low is more likely to be tested) after volatility.
My research shows on the markets I trade Bund and Stoxx, that an inside day happens about 15% of the time, which confirms the stats that I heard from my friend.
But when I added volatility, defined by range and volume, that within normally volatility (equal or under 1 Standard Deviation) then the inside day happens about 10% of the time, and when volatility is outside 1 SD, then an inside days happens about 20% of the time, so volatility increases the chances of an inside day, not decreases the chances.
So whilst there is still a low percentage chance of inside day whether there is volatility or not, that is not the point. We must confirm our statistics ourselves if we are going to use them as an edge within our trading.
Please see the Bund on Friday for an example of this.