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Pal, how much of this have you coded in AFL, and would you be willing to
share it?
Dave
> I am of the view that one's position size would be best served if it
> is a function of trade risk (MaxRisk in AB) and equity rather than
> volatility. After finding the optimum quality (quality = expectancy
> * opportunities) of a system by disabling position sizing rules, re-
> enabling the position sizing rules will result in better performance
> than before, especially if the sizing is a function of trade risk
> and equity.
>
> In my opinion, the market condition (trending/cyclic) does matter
> when considering what type of stops to use and the type of stop (SAR
> for e.g.,) may take into account the volatility. Welles Wilder
> Volatility Index System is such a system study described in the
> book "New Concepts in Technical Trading Systems," Trend Research,
> P.O. Box 128, McLeansville N.C. 27301.
>
> This study sets trailing stops based on a multiple of the
> volatility. When a market or a stock gets less volatile, the stops
> come in closer to protect profits; when volatility increases, the
> stops gradually expand away from the price to avoid being hit by
> random price spikes.
>
> This system tends to trade less frequently than some other's and can
> make more per trade, with fewer commissions. Other systems may be
> more aggressive and make a little more in the end, but with more
> trading.
>
> Wilder originated the idea of Average True Range (ATR) which Larry
> Williams later incorporated into almost all of his systems. The
> Volatility Index measures the ATR and then uses a fraction of it to
> add or subtract from the "most significant close in a trade" ("SIC",
> i.e.: the highest or lowest close since the position was taken.) A
> constant factor is then multiplied by the ATR to get the "ARC," or
> Average Range times Constant. The stop-and-reverse (SAR) is placed 1
> ARC below the SIC if the system is long, and 1 ARC above the SIC if
> the system is short.
>
> The bottom line is that since the SAR is calculated from an extreme
> close, rather than from just the previous day's close, the system
> can't miss a trend - it can be whipsawed, but if the market starts
> to drift on low volatility, the stops will come in tighter, and
> reverse the trade if it goes the wrong way. Since the close changes
> every day, while the extreme points change only when new equity is
> being made, this system, based on the trade extremes rather than the
> daily closes, is very smooth and can stick with a trend for long
> periods. It has the advantage over other trend followers in that it
> self regulates for volatility; this can reduce the lag associated
> with moving averages and oscillators, without increasing the false
> signals.
>
> This unique and valuable indicator combines well with other studies,
> and allows you to filter your signals in accordance with the trend,
> thus enhancing accuracy and profitability while reducing drawdown.
> I've used this indicator for filtering both day and position trades.
> It works well with 15 minute, 30 minute and 1 hour charts as well as
> with daily charts.
>
> one shouldn't look at just the cross-overs for signals, this is too
> simplistic. One should watch the distance between the stops and the
> price action. When that distance becomes very wide, a snap-back will
> often take place instead of the trend change you might otherwise
> expect. One should watch especially for breakout signals to confirm
> the true direction at these important junctures.
>
> When plotting Wilder's Volatility one'll need to input both a long
> and short factor. Wilder's original study uses the same factor for
> both long and short, but it is better to enter separate values. This
> will be useful in a market that has an established trend. Make the
> factor smaller in the direction of the trend. If the trend is up,
> make the long factor a little smaller; this will bias the system to
> be more sensitive in that direction. The reverse rules apply in a
> down market.
>
> A smaller factor makes the stops closer on that side of the market.
> Wilder suggests factors of 2.8 to 3.2 but there's no set rule and
> one should experiment with different markets. It can also be used
> as a most excellent filter.
>
> Wilder suggests ATR period of 7 but you can experiment. Longer
> periods make the indicator smoother but tend to negate the automatic
> volatility adjustment feature.
>
> rgds, Pal
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