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In a message dated 12/11/98 2:28:33 PM, dmishaan@xxxxxxxxxxx writes:
<<I am currently working on testing a long term trend following system which
trades a basket of commodities. I am looking for a volatility based stop to
employ with this system. Is anyone using a volatility based stop with
success. Also, anyone have experience or the code for vidya, is it any
good?
>>
I can't help with the vidya stuff but I have a couple of volatility based stop
ideas to pass along. The following information is extracted from Traders Club
Bulletin #14 which was part of a series of articles I wrote dealing with uses
of Average True Range. For a full version of this and other Club Bulletins
please go to http://traderclub.com/bulletin.htm
THE CHANDELIER EXIT: We have often advocated the importance of good exits and
this is one of our favorites. The exit stop is placed at a multiple of
average true ranges from the highest high or highest close since the entry of
the trade. As the highs get higher the stop moves up but it never moves
downward.
Examples:
Exit at the highest high since entry minus 3 ATR on a stop.
Exit at the highest close since entry minus 2.5 ATR on a stop.
Application: We like the Chandelier Exit as one of our exits for trend
following systems. (The name is derived from the fact that the exit is hung
downward from the ceiling of a market.)
This exit is extremely effective at letting profits run in the direction of a
trend while still offering some protection against a major reversal in trend.
In fact our research has shown that this exit is so effective that you can
enter futures markets at random and if you use this exit the results over time
will be profitable. (If you don't believe us just try it.) When used for
long term trend following the best values for the ATR in most markets ranges
somewhere between 2.5 and 4.0.
THE YO YO EXIT: This exit is very similar to the Chandelier Exit except that
the ATR stop is always pegged to the most recent close instead of the highest
high. Since the closes move higher and lower, the stop also moves up and down
(hence the Yo Yo name). Although this stop appears similar to the Chandelier
Exit the logic is quite a bit different. The Yo Yo Exit is a classic
volatility stop that is intended to recognize an abnormal adverse price
fluctuation that occurs in one day. This abnormal volatility is often the
result of a news event or some important technical reversal that is likely to
signal the end of a trend. This logic makes the YO YO exit very effective and
we seldom regret being stopped out whenever this exit is triggered.
We should caution you that the Yo Yo stop should never be our only loss
protection because if the price moves slowly against our position the Yo Yo
stop also moves away each day and, in theory, the stop may never be hit.
Combining the exits: The Yo Yo and the Chandelier exits work best when used
together. The Chandelier Exit is typically set at 3 ATRs or more from a high
point and never lowered; therefore it will protect us against any gradual
reversal of trend. The Yo Yo exit is typically set at only 1.5 to 2.0 ATRs
from the most recent close and will protect our position from unusual one day
spikes in volatility. When used together the operative stop each day would be
whichever of the two stops is closest.
Money Management Advice: When using any stops based on multiples of ATR we
should keep in mind that volatility can quickly expand to where our risk is
greater than we intended. We do not want to unknowingly exceed the risk
limitations dictated by our money management scheme so we should also have a
“worst case” dollar based stop available or be prepared to reduce our position
size quickly as the ATR values expand. When should we reduce our position
size and when should we implement our fixed dollar stop?
If we are on the right side of the volatility expansion it may not be wise to
reduce our position size just as the trade is beginning to do what we hoped
for. For this reason I prefer to implement the dollar based stop on
profitable positions rather than reducing the size of winning positions
prematurely. We obviously want to have big positions in our winners and small
positions in our losers. Therefore it would make sense to reduce our position
size only if the volatility is increasing in a trade that is going against us.
Once extremely large profits have been achieved, positions can safely be
reduced without sacrificing too much in the way of potential profits.
Hope this info helps. I don't do coding but I know there are others on the
list that have code for these exits.
Chuck LeBeau
http://traderclub.com/
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