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QCOM gained 2000% last year. It's volatile. I believe the ATR stop is
supposed to be used on trending vehicles and not vehicles which are stuck in
trading ranges which QCOM has been since December. Tuesday was a 5 or 6
standard deviation event for the NASDAQ. Any trading method you develop,
test or optimize strictly around that event will fail going forward. The
same goes for QCOM, it is not an average stock. Fact is, last year QCOM was
an 8 or 9 standard deviation stock. It is a stock that everyone, EVERYONE,
E-V-E-R-Y-O-N-E knows was up 2000% last year and few of them got a piece
last year, but everyone wants a piece this year but apparently none of them
want to risk 24%.
Having said all that, your assessment is correct: you would be risking 24%
in the current conditions. That's the risk. The reward (possibly) is half
of last year's gain? 1000%? The current price target on it by one analyst
is $250. That's about %60 from where it is now and when (if) it gets there,
the "analyst" will come up with a perfectly rational (in this market)
explanation for why $5000 is reasonable (if they develop a way to backup
your brain so that if you're ever in a car accident, you can restore it,
then the stock should trade at 47.8 times it 2008 revenues...unless IBM
develops a competing system and then there will be lawsuits if you back you
brain up with a QCOM system and the hospital where they take you only has
the IBM restore utility...).
There are 10000+ stocks on the NYSE and NASDAQ. ATR stops will work well on
some of them right now. But not forever. And some of them will need an
ATR*2 stop, others will need ATR*3. You have to figure out which ones, when
and how much. Are we having fun yet?
Kent
-----Original Message-----
From: Paul Altman <paulha@xxxxxxxxxxxxx>
To: omega-list@xxxxxxxxxx <omega-list@xxxxxxxxxx>
Date: Sunday, April 09, 2000 12:59 AM
Subject: Volatility stops novice
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
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