Adjusting your stop based on volatility
- Thread starter I$land
- Start date
Well, I use ATR for 2 things. 1 is using it to set my stops and position size. If the 20 day ATR on a stock is 3 points, and my stop is always 1/2 an ATR for every stock and I want to risk 2% of a 100K account, I would take x amount of shares based on those parameters.
I also use an ATR
rice ratio along with the VIX as sort of a "sensitivity" knob. The higher those values go, the less sensitive my trigger is. Likewise, the lower those values are, the more sensitive my trigger is. That gives me a more consistent number of trades month to month. Before I did this, I would be getting more trades during volatile months and a lot less during slow periods. Now I can pull out more trades during slow periods as I've adjusted for volatility (the opposite of the problem most have with volatility).
Why do I use VIX? Cause I can get historical data on it for backtesting reasons and apply it forward. I need hard numbers for automation. I'm not going to look at every chart for the past few years and estimate what the volatility was.
BTW, I use a 20 day ATR for that one particular strategy.
HTH
I also use an ATR
rice ratio along with the VIX as sort of a "sensitivity" knob. The higher those values go, the less sensitive my trigger is. Likewise, the lower those values are, the more sensitive my trigger is. That gives me a more consistent number of trades month to month. Before I did this, I would be getting more trades during volatile months and a lot less during slow periods. Now I can pull out more trades during slow periods as I've adjusted for volatility (the opposite of the problem most have with volatility).Why do I use VIX? Cause I can get historical data on it for backtesting reasons and apply it forward. I need hard numbers for automation. I'm not going to look at every chart for the past few years and estimate what the volatility was.
BTW, I use a 20 day ATR for that one particular strategy.
HTH
This is one i struggle with now in that after so many ticks in futures I want to go to B/E but I know it just seems wrong. It's like asking the market to whack your stop because you are inside the current trading range.
I believe stop should be based on market structure not an arbitrary number. Sometimes that means a larger stop than my account can handle so I pass. Oh well next trade.
I believe stop should be based on market structure not an arbitrary number. Sometimes that means a larger stop than my account can handle so I pass. Oh well next trade.
bespoke - Thanks for the clarifications. You system seems to be a nice piece of work. You've given me some good ideas to work with.
JSSPMK - I agree, if you take more risk you definitely have to reduce your size or else you're asking for trouble. The idea is to find a way of taking more risk only when necessary in order to keep your expectancy constant (instead of going into a drawdown) just because of a temporary increase in volatility.
JSSPMK - I agree, if you take more risk you definitely have to reduce your size or else you're asking for trouble. The idea is to find a way of taking more risk only when necessary in order to keep your expectancy constant (instead of going into a drawdown) just because of a temporary increase in volatility.
From dandx - "I believe stop should be based on market structure not an arbitrary number. Sometimes that means a larger stop than my account can handle so I pass. Oh well next trade."
I know what you mean. I guess it all depends on how you trade. If you're a discretionary trader and you only trade based on structure than your stop should be based on that also.
But if you trade based on stats and you've been able to statistically determine the best stop & target to use then IMO it shouldn't matter if you go with or against structure. I mean even if you follow structure, you will not have a 100% win rate. If you trade based on your stats, then sometimes you will be with structure and sometimes you won't but you should still make money if your system as a good historical expectancy.
Maybe I'm wrong. What do you guys think ?
I know what you mean. I guess it all depends on how you trade. If you're a discretionary trader and you only trade based on structure than your stop should be based on that also.
But if you trade based on stats and you've been able to statistically determine the best stop & target to use then IMO it shouldn't matter if you go with or against structure. I mean even if you follow structure, you will not have a 100% win rate. If you trade based on your stats, then sometimes you will be with structure and sometimes you won't but you should still make money if your system as a good historical expectancy.
Maybe I'm wrong. What do you guys think ?
Well stated. I think we can all agree that minimal positions and a loose enough hard stop at the onset of a trade is of prime importance to risk and money management, but your question was about not getting stopped-out on high volatile days. Most simply don't feel comfortable trading high volatile stocks or markets. And we're seeing that projected in a lot of posts in this thread. It's very composition is a result of manic trading. Is it fear-based? Is it over-optimism (like 'ole Ben nearly promising more rate cuts to counter borrowers into '09 this morning)? No matter the reason, the impetus will move just as quickly and with equal volatility in the opposite direction when more seasoned and mechanical investors move the markets on sheer volume, bushel orders.
Then comes the inevitable low volatility trading range when market movers reassess the markets and their portfolios.
How best to trade the high volatile chop: don't trade it.
How best to trade the high volatile chop if you're comfortable in the environment? Larger trailing stops manipulated to account for retraces and larger profit targets. The question isn't risk, because if you've gotten a horrible fill or a trade goes against you immediately then you really haven't done your job. The question is can you read price action to the point of having an anticipated idea of where the market could go within the chop. For all the touting of system trading, too few will admit they trade anything than swing propulsion, when they're feeling surly. Big moves scare them. More risk scares them. But where's the big risk. Two points hard stop is more than enough room for price to breathe. In practice you rarely need more than 5 ticks hard stop. But once in a trade to your favor why agree to risk losing money on principle? That doesn't make any sense.
Cut your losses short and let your profits ride, said Charles Dow first. But if you can't anticipate where price is heading then the real source of anxiety is where to lock in profits, and add positions. That's where index percentiles and ATRs come in.
Was the last swing 40 points? Ever know a correction of a swing to retrace 100%? Right. Divide by 62% and manipulate the trailing step frequency to account for 31% retracement. And lo and behold, another strategy!
Percentiles, or ATRs, or relevant points of control, &c.; or a number that you use to limit counting sheep to get to sleep. Whatever works for you, is what's best for you.
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