How to use Volatility Based Stop Loss in Swing Trading ?

[pasha]

How to use/calculate Volatility Based Stop Loss in Swing Trading ?

I am trying to understand on how to calculate/reach an estimated stop loss numeric figure (if any) for swing trading(my time frame would be 1-2 weeks) . Here are a few questions I would like to ask:
1) Where and how (calculation wise) to place the first Stop after entering a trade?
1)How do swing traders usually reach a value to be used in Stop Loss and trailing stops
2) Do they use a volatility indicator (ATR or any other), if yes then which one works well. If not then how to calculate ut using a spreadsheet?
3) Can any one direct me to a tutorial explaining the topic I am trying to understand?

I'll appreciate your input in this regard. Thanks in advance.

 

[pasha]

While I was searching for the answer of my question, I came across some very useful info on using volitility stops. I am posting here for anyone who may need it.

Thanks

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Volatility Stops

What happens if the current price is at 15 and the prior minor low is at 10? If price were to drop back, you’d give away 30% of your profits before the stop loss order sold your position. This situation often occurs during straight-line runs or in low priced stocks in which a small price move represents a significant percentage change. That’s where a volatility stop comes in handy.


Compute the average daily high-low price range for the prior month, multiply by 2, and then subtract the result from the current low price.

The following table shows an example based on Exxon Mobile’s stock (XOM) during July 2005.

The following table shows an example based on Exxon Mobile’s stock (XOM) during July 2005.

-------Date ...............High.......Low......Difference
----------------------------------------------
-------1-Jul-05 ........ 58.44......57.60........ 0.84
-------5-Jul-05 .........60.23......58.46........ 1.77
-------6-Jul-05 .........60.73......59.03........ 1.70
-------7-Jul-05 .........59.54......58.29........ 1.25
-------8-Jul-05 ........60.12......58.97........ 1.15
-------11-Jul-05........60.00......58.72........ 1.28
-------12-Jul-05........60.24......59.40...........0.84
-------13-Jul-05........60.05......59.37.......... 0.68
-------14-Jul-05 .......60.15......58.31...........1.84
-------15-Jul-05 .......58.94......57.88...........1.06
-------18-Jul-05 .......58.47......57.69...........0.78
-------19-Jul-05........58.82......57.93...........0.89
-------20-Jul-05........59.02......57.99...........1.03
-------21-Jul-05........59.05......57.85...........1.20
-------22-Jul-05........59.70......58.15...........1.55
-------25-Jul-05........60.47......59.45...........1.02
-------26-Jul-05........59.97......59.50...........0.47
-------27-Jul-05........59.90......58.85...........1.05
-------28-Jul-05........60.11......58.97...........1.14
-------29-Jul-05........60.17......58.75...........1.42
---------------------------------------------------------
-------Average :........................................1.15
-------------------------------------------------------

The difference column is the intraday high minus the low. The average of the differences for the month is $ 1.15. Multiply this by 2 to get the volatility, or $2.30. Based on the volatility of the stock, you should place your stop no closer than 56.45. That’s $2.30 subtracted from the current low (58.75 on July 29). If price makes a new high, then recalculate the volatility based on the latest month, multiply it by 2 and subtract it from the current low. This method helps you from being stopped out by normal price volatility.

 

[Grey1]

While I was searching for the answer of my question, I came across some very useful info on using volitility stops. I am posting here for anyone who may need it.

Thanks

----------------------------------
Volatility Stops

What happens if the current price is at 15 and the prior minor low is at 10? If price were to drop back, you’d give away 30% of your profits before the stop loss order sold your position. This situation often occurs during straight-line runs or in low priced stocks in which a small price move represents a significant percentage change. That’s where a volatility stop comes in handy.


Compute the average daily high-low price range for the prior month, multiply by 2, and then subtract the result from the current low price.

The following table shows an example based on Exxon Mobile’s stock (XOM) during July 2005.

The following table shows an example based on Exxon Mobile’s stock (XOM) during July 2005.

-------Date ...............High.......Low......Difference
----------------------------------------------
-------1-Jul-05 ........ 58.44......57.60........ 0.84
-------5-Jul-05 .........60.23......58.46........ 1.77
-------6-Jul-05 .........60.73......59.03........ 1.70
-------7-Jul-05 .........59.54......58.29........ 1.25
-------8-Jul-05 ........60.12......58.97........ 1.15
-------11-Jul-05........60.00......58.72........ 1.28
-------12-Jul-05........60.24......59.40...........0.84
-------13-Jul-05........60.05......59.37.......... 0.68
-------14-Jul-05 .......60.15......58.31...........1.84
-------15-Jul-05 .......58.94......57.88...........1.06
-------18-Jul-05 .......58.47......57.69...........0.78
-------19-Jul-05........58.82......57.93...........0.89
-------20-Jul-05........59.02......57.99...........1.03
-------21-Jul-05........59.05......57.85...........1.20
-------22-Jul-05........59.70......58.15...........1.55
-------25-Jul-05........60.47......59.45...........1.02
-------26-Jul-05........59.97......59.50...........0.47
-------27-Jul-05........59.90......58.85...........1.05
-------28-Jul-05........60.11......58.97...........1.14
-------29-Jul-05........60.17......58.75...........1.42
---------------------------------------------------------
-------Average :........................................1.15
-------------------------------------------------------

The difference column is the intraday high minus the low. The average of the differences for the month is $ 1.15. Multiply this by 2 to get the volatility, or $2.30. Based on the volatility of the stock, you should place your stop no closer than 56.45. That’s $2.30 subtracted from the current low (58.75 on July 29). If price makes a new high, then recalculate the volatility based on the latest month, multiply it by 2 and subtract it from the current low. This method helps you from being stopped out by normal price volatility.

Pasha,

How would that stop loss technique be affected with the equity curve decline ?
Another word, would you still use the same amount of stop loss even if the capital halves ?

Grey1

 

[pasha]

How would that stop loss technique be affected with the equity curve decline ?
Another word, would you still use the same amount of stop loss even if the capital halves ?
Grey1

This stop loss tehniquie could be used when other stops loss placement techniques may result in a stop, which is too low and risk more losses. If somone finds that the volatility stop could as well result in loosing half the capital then it shouldn't be used. One must go for a practicable stop placement.

For reference Other Stop Loss Methods are:
(1) Minor Low Stops , 2) Gaps, 3) HCRs (Horizontal Consolidation Regions) 4) Fibonacci retracements

 

[North_Face]

For reference Other Stop Loss Methods are:
(1) Minor Low Stops , 2) Gaps, 3) HCRs (Horizontal Consolidation Regions) 4) Fibonacci retracements

pasha,

Time based stops are another that should be added to that list. The use of time based (# of bars) stops varies in importance depending on time-frame, type of set-up and market conditions present.

One commonly stated characteristic of pullbacks in a trending market is that they are most likely to resume a trend if they take place in the range of 2 - 7 bars. Depending on the testing of this characteristic for time-frame and market conditions you may find it beneficial to research further.

This is just an example of the use of time-stops from what can be found out there. Whichever types of set-ups that you trade may or may not be traded more efficiently with the added usage of a time-stop.

NF