Volatility Filter

[dima777]

Quote from Hook N. Sinker:

I do not use this system for real trading. For real trading I use a simple multiplier times range.

I remember wondering about volatility: What happens if I take very large position size when price volatility increases? What if I reduce position size during times of increased volatility? With exponential volatility based position sizing I can use the square of ATR, or the square root of ATR to calculate position size. This experiment tests nonlinear position sizing.

To my surprise I found that the growth rate, greatest draw down and information ratio do not change much from experiment to experiment.

I remember testing only a few stocks; futures or currencies may test differently.

These simulations model long term position trades, not day trading.

I see..thanks for the clarification...to clarify the purpose of my thread - I was interested in what are the methods to use volatility to filter out mega turbulent times... A simple rule as one below can be a good starting point:

IF CURRENT TR= ATR + N STANDARD DEVIATIONS => STOP TRADING (AND...GET SOME SLEEP

 

[dima777]

Quote from Equalizer:

That sounds about right, the information ratio shouldn't change as the info coefficient and breadth-per-unit-time wouldn't change either, or are you interpreting this differently from Grinold's classic paper? Remember position size doesn't affect breadth, since these are meant to be independent trades.

can you please refer me to the document you are speaking of? thanks!

 

[bespoke]

I used to change position size based on volatility (usually ATR) but this past month I kept my position size constant and all my systems/edges were at least 100% more profitable than the months before.

So for me, I'm going to embrace this volatility and profit from it while it lasts. I have extreme confidence in my systems as I've rarely had a losing day this year.

So, that's just another point of view.

 

[dima777]

thanks for your opinion! it would be interesting of the system components that you use

 

[Equalizer]

Quote from dima777:

can you please refer me to the document you are speaking of? thanks!

Journal of Portfolio Management if memory serves, can't remember the year. The paper was called "The Fundamental Law of Active Management". The work is reproduced in his well known book with a co-author:

http://books.google.com.au/books?id...a=X&oi=book_result&resnum=4&ct=result#PPP1,M1

 

[NeoRio1]

three words, look at chart.

 

[dima777]

I have found during extensive testing of different systems that looking at chart is best substituted with a rigid computational algorithm...in short - allow your pc to do the looking - that is, encapsulate your logic into a set of rules that the computer can evaluate objectively.