How to use/calculate Volatility Based Stop Loss in Swing Trading ?

[Pashaz]

I am trying to understand on how to calculate/reach an estimated stop loss numeric figure (if any) for swing trading(my time frame would be 1-2 weeks) . Here are a few questions I would like to ask:
1) Where and how (calculation wise) to place the first Stop after entering a trade?
11)How do swing traders usually reach a value to be used in Stop Loss and trailing stops
2) Do they use a volatility indicator (ATR or any other), if yes then which one works well. If not then how to calculate ut using a spreadsheet?
3) Can any one direct me to a tutorial explaining the topic I am trying to understand?

I'll appreciate your input in this regard. Thanks in advance.

 

[nazzdack]

Volatility is related to how much the market moves. Risk is what you're willing to lose. Focus more on risk instead of volatility and keep your losses small. Be sure to trade markets whose volatility doesn't exceed your risk tolerance. Trade sleepier markets before escalating into greater-volatile markets. Using arbitrary risk measures of 1%, 2% or 3% of your account value is a good place to start. Keeping an eye on prior price extremes can also be useful. Try that first.

 

[Pashaz]

Many Thanks for the reply Nazzdack. While I was searching for the answer of my question, I came across some very useful info on using volitility stops. I am posting here for anyone who may need it.

Thanks

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Volatility Stops

What happens if the current price is at 15 and the prior minor low is at 10? If price were to drop back, you’d give away 30% of your profits before the stop loss order sold your position. This situation often occurs during straight-line runs or in low priced stocks in which a small price move represents a significant percentage change. That’s where a volatility stop comes in handy.


Compute the average daily high-low price range for the prior month, multiply by 2, and then subtract the result from the current low price.

The following table shows an example based on Exxon Mobile’s stock (XOM) during July 2005.

The following table shows an example based on Exxon Mobile’s stock (XOM) during July 2005.

-------Date ...............High.......Low......Difference
----------------------------------------------
-------1-Jul-05 ........ 58.44......57.60........ 0.84
-------5-Jul-05 .........60.23......58.46........ 1.77
-------6-Jul-05 .........60.73......59.03........ 1.70
-------7-Jul-05 .........59.54......58.29........ 1.25
-------8-Jul-05 ........60.12......58.97........ 1.15
-------11-Jul-05........60.00......58.72........ 1.28
-------12-Jul-05........60.24......59.40...........0.84
-------13-Jul-05........60.05......59.37.......... 0.68
-------14-Jul-05 .......60.15......58.31...........1.84
-------15-Jul-05 .......58.94......57.88...........1.06
-------18-Jul-05 .......58.47......57.69...........0.78
-------19-Jul-05........58.82......57.93...........0.89
-------20-Jul-05........59.02......57.99...........1.03
-------21-Jul-05........59.05......57.85...........1.20
-------22-Jul-05........59.70......58.15...........1.55
-------25-Jul-05........60.47......59.45...........1.02
-------26-Jul-05........59.97......59.50...........0.47
-------27-Jul-05........59.90......58.85...........1.05
-------28-Jul-05........60.11......58.97...........1.14
-------29-Jul-05........60.17......58.75...........1.42
---------------------------------------------------------
-------Average :........................................1.15
-------------------------------------------------------

The difference column is the intraday high minus the low. The average of the differences for the month is $ 1.15. Multiply this by 2 to get the volatility, or $2.30. Based on the volatility of the stock, you should place your stop no closer than 56.45. That’s $2.30 subtracted from the current low (58.75 on July 29). If price makes a new high, then recalculate the volatility based on the latest month, multiply it by 2 and subtract it from the current low. This method helps you from being stopped out by normal price volatility.

 

[TheFinn]

Quote from Pashaz:

I am trying to understand on how to calculate/reach an estimated stop loss numeric figure (if any) for swing trading(my time frame would be 1-2 weeks) . Here are a few questions I would like to ask:
1) Where and how (calculation wise) to place the first Stop after entering a trade?
11)How do swing traders usually reach a value to be used in Stop Loss and trailing stops
2) Do they use a volatility indicator (ATR or any other), if yes then which one works well. If not then how to calculate ut using a spreadsheet?
3) Can any one direct me to a tutorial explaining the topic I am trying to understand?

I'll appreciate your input in this regard. Thanks in advance.

I am just trading a FOREX demo right now, but it helps me set my stop loss levels (I hold for 1-2 weeks, just like you). I initially had set my stop way too close, and I got stopped out too many times on what would have been good trades.

I had initially set my stop-loss to around 50 pips, now it's at 150-200 pips- I've learned ;-). So, to answer your question, use your experience with a demo to adjust your stops appropriately.

 

[agpilot]

Quote from nazzdack:

Volatility is related to how much the market moves. Risk is what you're willing to lose. Focus more on risk instead of volatility and keep your losses small. Be sure to trade markets whose volatility doesn't exceed your risk tolerance. Trade sleepier markets before escalating into greater-volatile markets. Using arbitrary risk measures of 1%, 2% or 3% of your account value is a good place to start. Keeping an eye on prior price extremes can also be useful. Try that first.

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Hello nazzdak: That's good advice. I'll 2ed your comments and add that I use a 3 month chart that has a 1 day MA in a wide green line and all the days highs-lows are in bright red. This quick visual check reminds me that those bright red intraday red spikes away from the green moving average can cut me a real quick loss so I'll pass on those positions that have daily volitility that's too high. I just got tired of getting "spiked-out" a long time ago so I prefer to Focus on less risk of getting spiked out intraday. It makes life easier in the market.. agpilot.