Developing IntraDay Strategies Using ATR for Risk

[SimpleMeLike]

Hello,

I have been developing and backtesting/optimizing intraday trending (open bell to exit at close) strategies using static profit target and stop losses.

Evaluating the performance back tested strategies, I notice not so good results using static profit target and stop losses. I think strategies have a challenging time determine 1 stop loss and 1 profit target for +1000 back tested trades. It doesn't seem idea. Therefore, I would like to experiment (or add to my exit methods) with dynamic or adaptive stop losses (even profit target) so the strategy can try and adapt with market changes. So I would like to use ATR (or average true range)

Regarding IntraDay strategies (just your thoughts or opinions):

1. How many previous days do you recommend using to measure ATR and calculate stop loss? I was thinking of using 1 day ATR to calculate. For example, if using 1 hr time frame, I would calculate daily ATR with just ATR(24) then multiply by a certain percentage (maybe 20%) to calculate stop loss amount for the day. I guess I could optimize ATR(X) to something favorable.

2. What is your recommendation for setting profit target (or trailing stop) using a ATR methods? I was going to test 2 times whatever stop loss range to get favorable reward vs risk.

Appreciate thoughts in advance or any other comments regarding dynamic stop loss.

Thanks,

 

[digitalnomad]

You’re on the right track. Work hard at analyzing the different variables to:

1. Find positive expectancy
2. Find optimal risk/reward values
3. Have a handle on drawdown

Not much more to it. Easier said than done though.

 

[Xela]

I would like to experiment (or add to my exit methods) with dynamic or adaptive stop losses (even profit target) so the strategy can try and adapt with market changes.

Absolutely. This is kind of canonical: you need to do this.

So I would like to use ATR (or average true range)

Why?

Granted, it may well be a big improvement on a constantly-fixed SL and TP, and it may lead (with enough testing) to significantly improved results, but it's surely very unlikely ever to be as good as using S/R-based SL's and TP's?

1. How many previous days do you recommend using to measure ATR and calculate stop loss?

However many produce the best results, overall, when you test a large selection of different ones.

Sorry if it sounds unhelpful, but it's not something you can determine in abstract. What works well works well, and what works badly works badly.

Auntie Xela has read your tea-leaves and sees copious backtesting and forward-testing in your future ...

Whatever lookback period you use (and for that matter whatever multiples you use) there are always going to be some anomalies: the occasional major thrust-bar that makes a mess of an ATR reading; the occasional day with no range worth talking about for no discernible reason, etc. etc.

What is your recommendation for setting profit target (or trailing stop) using a ATR methods?

A.B.T.

("Always be testing".)

I was going to test 2 times whatever stop loss range to get favorable reward vs risk.

Appreciate thoughts in advance or any other comments regarding dynamic stop loss.

You're right to be thinking about this.

For myself, I wouldn't start with assumptions. Why should a 1:2 R:R ratio happen to work out well? Your trading method might work out really well with a much bigger or much smaller R:R than that, but badly with that one. You just can't tell this without testing. You have to decide what to test, admittedly, but you start judging that through familiarity with the type of market, type of trading and type of volatility you're likely to encounter, and a whole selection of other stuff ... none of which you've said a word about. Making it hard to advise you.

But my big question for you is "Why an ATR-multiple rather than perceived and/or anticipated and/or recent and/or multiple S/R lines/zones"? (You may have a perfectly good answer to this question, of course, in which case let's hear it ... but it is a significant question!).

PS: One other observation which might help: the ATR-multiples to use for SL and TP are highly likely to be far more important than the ATR's lookback period is, in affecting overall, long-term outcomes.

 

[Spectre2007]

ATR and STD for me have been a proxy of volatility for intraday strategies.

 

[fordewind]

That`s nonsense.It`ll quickly curve fit your stops to the past optimum,so youll eventually catch the periods where youll be smoked.The history does not repeat itself.

You`d need some gambling variables for your strategy to be viable.In contrast, you may wish to apply some ridiculously big stops.

 

[SimpleMeLike]

Thank you so much Xela for the good and thoughtful response. You gave me some ideas to think about.

I will reply below.

Why?

Granted, it may well be a big improvement on a constantly-fixed SL and TP, and it may lead (with enough testing) to significantly improved results, but it's surely very unlikely ever to be as good as using S/R-based SL's and TP's?

You asked why I would like to test using ATR as stop loss placement. I am not sure why use ATR, I read it in a book and online content. I am still learning ATR. I am glad you pointed out S/R-based SL and TP because I do have experienced trading S/R but only pivots. The strategies I was testing was intraday swing trending strategies. Attached is an example of what I can test even with an ema cross strategy and use the pivots for stop loss placement. Atleast then I know if i am stopped out, price is trending a different direction and the stop out is worth it.

Sorry if it sounds unhelpful, but it's not something you can determine in abstract. What works well works well, and what works badly works badly.

Thanks and no need for "sorry". You are correct, what ever the tested data shows, that what works. Makes great sense.

Auntie Xela has read your tea-leaves and sees copious backtesting and forward-testing in your future ..

lol, I agree with you on that. Lots of testing underway. I will back test ATR(X)*Y, with X representing look back period, and Y the multiple.

But my big question for you is "Why an ATR-multiple rather than perceived and/or anticipated and/or recent and/or multiple S/R lines/zones"? (You may have a perfectly good answer to this question, of course, in which case let's hear it ... but it is a significant question!).

Thanks for the question.

My reason for ATR-multiple was because I read it in a book and online and I never thought of using ATR, this is my first time today studying ATR and its advantages. I was going to test with some strategies I wrote for intraday swing strategies.

The S/R I am familiar with (and please recommend more) pivots points, O.H.L.C and the S/R I use to see (these can not be programmed from my knowledge) on the chart while discretionary trading.

Are there more support and resistance I am missing?

Thanks for your advice, especially regarding not looking for a certain R:R to better then another R:R.

Thanks

 

[SimpleMeLike]

That`s nonsense.It`ll quickly curve fit your stops to the past optimum,so youll eventually catch the periods where youll be smoked.The history does not repeat itself.

You`d need some gambling variables for your strategy to be viable.In contrast, you may wish to apply some ridiculously big stops.

Thanks fordewind for your comment.

Can you explain a bit more your comments "That`s nonsense. It`ll quickly curve fit your stops to the past optimum,so youll eventually catch the periods where youll be smoked."

What is nonsense you are referring to?

I always use Optimization for in-sample data testing to curve fit.

What do you mean "You`d need some gambling variables for your strategy to be viable." What means gambling variables?

 

[digitalnomad]

You`d need some gambling variables for your strategy to be viable.In contrast, you may wish to apply some ridiculously big stops.

Specifically what type of gambling variables? If we’re talking martingale, then he might as well hit the craps table.

 

[digitalnomad]

Granted, it may well be a big improvement on a constantly-fixed SL and TP, and it may lead (with enough testing) to significantly improved results, but it's surely very unlikely ever to be as good as using S/R-based SL's and TP's?

I wouldn’t be so sure of that, as I was once in that train of thought regarding visual chart based S/R points. I proved myself wrong, but unless he can do that, then I can see favoring chart based S/R over constant value points. A huge advantage of using ATR or STD as @Spectre2007 mentioned is the ability to definitively quantify and size the trades in a more proportionate manner, which also paves the way for proper systematic and auto trading.

 

[fordewind]

Thanks fordewind for your comment.

Can you explain a bit more your comments "That`s nonsense. It`ll quickly curve fit your stops to the past optimum,so youll eventually catch the periods where youll be smoked."

What is nonsense you are referring to?

I always use Optimization for in-sample data testing to curve fit.

Nonsense to use ATR for risk measure.I know the automated guys who use ATR for signals on options, though.

What do you mean "You`d need some gambling variables for your strategy to be viable."

It mostly about the exucution frame in your strategy, i`m not going into specifics, though.It means, basically, to have a house advantage.For e.g., i tested a system where in the parameters, in the MM framework, the propfit was set to $1 dollar and the stop was set to $1000 dollars.The system showed the Sharpe over 40 and 60+ percents per annum.Dig deeper.