Stages Outlook of the Rally

[Billy]

Billy,

When you say the trailing stop will rise exponentially faster over time, why is that? I assume it has to do with contracting volatility but not sure how the math works to cause the stop to move this way.

Also, I'm trying to figure out how to use ATR in such a fashion that it can "target" drawdown percentages. In other words, if I'm not comfortable with the historical intra-trade drawdown of an instrument, is there a way to manipulate ATR to maximize return while keeping drawdowns to the stated percentage.

I confess I'm relatively new to the ATR concept.

Adam,

1) The trailing stop is a function of ATR% deducted from the highest closing price. The faster the ATR% decreases, the faster the trailing stop will get close to the trading price.

2) It is foolish to try to use ATR for targeting fixed drawdown percentages. If you can't stand more than X% drawdowns, just use a fixed X% percentage stop. But your performance will decrease drastically unless you sell often on targets. But even such a strategy with optimal targets will underperform significantly risk-adjusted returns from a trailing ATR% stop.

Billy

[Pierre Brodeur]

The trailing stop is a function of ATR% deducted from the highest closing price. The faster the ATR% decreases, the faster the trailing stop will get close to the trading price.

Very useful information Billy which makes me think of J. Welles Wilder's parabolic system (Stop and Reverse or SAR) presumably just on the long side.

I presume that the same exponential approach is valid when one is short? Yes or No
or the model is different for a short trade because your research has shown a different optimal stop strategy when short.

Pierre

[Pascal]

Very useful information Billy which makes me think of J. Welles Wilder's parabolic system (Stop and Reverse or SAR) presumably just on the long side.

I presume that the same exponential approach is valid when one is short? Yes or No
or the model is different for a short trade because your research has shown a different optimal stop strategy when short.

Pierre

We indeed use the same stop strategy for both Long/Short positions.

Pascal

[TraderD]

2) It is foolish to try to use ATR for targeting fixed drawdown percentages. If you can't stand more than X% drawdowns, just use a fixed X% percentage stop. But your performance will decrease drastically unless you sell often on targets. But even such a strategy with optimal targets will underperform significantly risk-adjusted returns from a trailing ATR% stop.

Billy

The term "X% drawdown with a fixed stop" is really a MAE (max adverse excursion) for a single trade, which is not the same as account drawdown on open equity spanning consecutive trades. Without extensive backtesting, I believe it's impossible to arrive at drawdown estimates for any given stop strategy.

Trader D