Is anyone using volatility based stops?

Does anyone on ET have any experience with volatility based stops? Has anyone tested volatility based stops vs fixed stops? Do they test better and how are people calculating them?

My gut instinct tells me that a percentage of weekly range would work? Or is monthly better?

All feedback welcome

cheers,

Runningbear

 

I found that stops based on a 1-week ATR generate about 20% more profit than fixed stops.

But this depends on your strategy and should be tested and optimized - gut instinct is no good here.

 

When I was swing trading stocks, I used to use 2x the 20 day EMA of the Daily ATR, updated daily.

Worked well keeping me in the trades, but I found that if I used that exclusively as a trailing stop, I would give back too much profit. For example if I caught a nice move and hit 30% profits, it could fall back to 20% - 24% before taking me out.

After a few times, I took a leaf out of O'Neil's book and when profits reached 25%, I would tighten the stop to 1x ATR.

If you trade a longer timeframe and look at weekly or monthly charts, then use an equivalent ATR. I was trading off daily charts.

 

You may want to take a look at something called a "Chandelier" stop which was conceived by Chuck Lebeau
Basically it's a volatility based stop which trails off the extreme price of a movement (highest high for long, lowest low for a short).
It's not perfect, but it can help you keep a decent amount of those parabolic moves without tightening you up so quickly that you get shaken out.

 

Currently using trailing stops at 5-day ATR while swing trading stocks. I am adjusting this with each successive day's range of course so that the ATR5 is effectively rolling. Performing well so far but the main advantage might be that profitable positions close in profit, it prevents me setting a target way out of reach.

 

Thanks for bringing this up. I hadn't thought of this one. Now you're going to make me do more work !! I'll post my results. I do currently have a volatility screen on one of my strats to allow it to work only under certain volatility levels and it tests out well.

 

for trend-following systems trailing with ATR is generally a good idea.

 

Thanks for the comments guys. All constructive feedback.

My main reason for wanting to incorporate a Volatility Based Stop is to keep me in the market when it's really moving. The big money is made on the big moves, but that means big counter moves which have to be dealt with intelligently.

I think I will start testing something based on a percentage of the rolling five day range just to see how it tests.

cheers,

Runningbear