Volatility stops novice

[Paul Altman <paulha@xxxxxxxxxxxxx>]

Folks:

I'm experimenting with trailing volatility stops and I'm immediately 
confused by the enormous resulting size of the stops, based on Tharp's 
suggestion to experiment with a 3 * ATR trailing stop, as a starting point.

1)  Let's look at QCOM: a recent 10 day weighted moving average of the ATR 
is, according to my calculations, ~8% at the close of Fri 4/7/00.  OK, it's 
a volatile stock, but a trailing stop of 24%?!!  Doesn't that seem like an 
awfully large stop?  Yes, you could position-size yourself down such that 
you only had, say, 1% of capital at risk, but still...if you're willing to 
take a 24% loss on a stock, aren't you pretty much admitting that you have 
no general confidence in the underlying concept of your entry signal?  What 
entry signal could you still believe in once you've lost more than 20% 
because of it?   It seems that if you're going to tolerate a 24% loss on a 
stock, you might as well have random entries, certainly they'd do just as well.

2)  Additionally, assuming for a second that QCOM remains as volatile for a 
while into the future, you'd have to have a profit of 32% before you'd even 
be assure of breaking even (after a possible 24% drop back to your original 
buy price).  After a 20% or 30% profit, shouldn't you be allowed to tighten 
your stop so that you actually are assured of keeping some of it?

3)  If the whole point of an x*ATR stop is to make sure that you're not 
stopped out due to the normal fluctuations of noise, isn't x=3 
extraordinarily generous?  If you very loosely assume that TR's tend to 
straddle the closing price, then really only _half_ of the TR should 
represent the normal downward fluctuations.  So x=3 means that you're 
setting a stop very approximately _6_ times larger than the average normal 
downside fluctuation in a given day.

What am I missing?   How can anyone seriously discuss a 3 * ATR trailing 
stop?  It sounded good until I actually looked at some numbers, and then I 
was completely perplexed!  Any help from you experienced volatility stop 
guys much appreciated.

Thanks.

       Paul