Introduction of the Bouhmidi Bands
The bouhmidi bands ® were developed by Salah-Eddine Bouhmidi and are based on implied volatility. They calculate an expected daily bandwidth under the assumption of normally distributed returns.
The bandwidth is based on 1σ or 2σ. This means that an underlying closes with a probability of 68% or 95% within the expected Bouhmidi bandwidth at the end of the day. Historical data over the past 20 years shows a strong robustness of the indicator.
Bouhmidi Bands - volatility indicator
Most known indicators such as Bollinger Bands or Keltner Channel focus only on historical volatility. Bouhmidi bands follow a different approach, namely an indicator based on implied volatility.
The Bouhmidi bands can be calculated across different asset classes.
Bouhmidi-Bands for daily use are most visible in 1M – 15M– Chart on the ProRealTime trading platform.
Two variables must be known for the calculation:
1. implied volatility via a volatility index - price data.
2. underlying - price data.
The benefits of using Bouhmidi Bands.
The Bouhmidi bands can be used to identify and filter "invisible" resistance and support that cannot be detected with simple chart analysis.
The Bouhmidi bands can be used for different trading approaches. For example, they are suitable for mean reversion and volatility breakouts.
If you combine the Bouhmidi bands with e.g. Keltner channel or Bollinger bands , you have the historical and implied volatility in one view in your ProRealTime chart.
Interpretation of the Bouhmidi bandwidth - Example DAX
- Calculation basis: DAX + VDAX-NEW.
- Expected bandwidth can be calculated for different time periods.
- Historically, however, the daily bandwidth provides the statistically best results.
- The bandwidth is given with the first and second standard deviation σ.
With a probability of 68% and 95% the underlying value closes within the determined Bouhmidi bandwidth in the considered period.
i.e. for Nov 16, 2020: with a probability of 68 %, the DAX closing price on Nov 16, 2020 will be between 13248,66 and 12904,78. With a probability of 95%, the DAX closing price on Nov 16, 2020 will be between 12420,60 and 12732,84.
Which markets are tradable with Bouhmidi bands?
Major Markets, for example:
-DAX with VDAX-NEW (Frankfurter Börse)
-S&P 500 with VIX (CBOE)
-Nasdaq with VXN (CBOE)
-Dow Jones with VXD (CBOE)
-Gold with GVZ (CBOE)
-WTI with OVX (CBOE)
-Apple with VXAPL (CBOE)
-Amazon with VXAZN (CBOE)
-Google with VXGOG (CBOE)
Disclaimer: This does not constitute investment advice and does not have regard to the specific needs of any person who may use the indicator. No warranty is given as to the accuracy or completeness of the information and any person acting on it does so entirely at their own risk.
All the best - MongiIG