ATR Based Trailing Stop, Improve Draw Down And Profit Capture In Prorealtime Systems
During the discussion around the true range break out system I had an idea to use Average True Range (ATR) for the initial stop loss, trailing stop and potentially profit values. This post focusses on the mechanics of the stop, next week I will post a video on how to swap a different stop for this one and optimise it.
The concept being that most systems were working better since May 2019 when volatility increased and by having fixed % values the system was being compromised during market conditions with less volatility.
This video runs through the steps taken in updating the stop loss, trailing stop value and take profit value from hard fixed values to ATR based values that will vary with current market volatility.
ATR based stop losses were found to outperform a fixed value but it was important to set a maximum points value to the stop as in period of very high volatility ie in March the ATR was up to 2% would create very wide stop loss values.
ATR based stop loss, trailing start and trailing step values all improved performance (in the systems tested so far) but an ATR based take profit was not beneficial. I believe that this shows that ATR can be used to accurately determine shorter term moves ie the stop and trailing start/break even but not the take profit as over time the ATR does not determine if this is a short term impulsive move or a move that establishes a trending longer move.
Example System That Uses This Stop (Shown In Video) True Range BreakoutUpload2011
Introduction/First Steps Video