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Volatility Stop

Andrew Stoeckley
posted this on July 19, 2011 12:11

The Formula . . . 



When Up Trend Detected....
   VSTOP = CL - MULT * TR

As Up Trend Continues....
   VSTOP = MAX(VSTOP.1, MaxCL - MULT * TR)

When Down Trend Detected....
   VSTOP = CL + MULT * TR

As Down Trend Continues....
   VSTOP = MIN(VSTOP.1, MinCL + MULT * TR)

Where...
     CL = Closing Price
     MULT = True Range Multiplier
     TR = True Range
     VSTOP.1 = Volatility Stop Value on Previous Bar
     MaxCL = Maximum Closing Price since Up Trend Began
     MinCL = Minimum Closing Price since Down Trend Began

Trend reverses between up and down when Closing Price crosses VSTOP.
 
The Presentation . . . 


 

 The Volatility Stop Indicator is plotted overlaying the candlesticks.  The blue line represents areas where an upward trend is detected.  Red line represents areas where a downward trend is detected.  The preferences seen below were used in this instance.
 
The Preferences . . . 


  • True Range Period - Period used when computing the True Range.

  • True Range Multiple - Multiplier for the True Range.

  • Long Color - Color, width, and style used to draw the long or upward trending line.

  • Short Color - Color, width, and style used to draw the short or downward trending line.
 
The Description . . .
The Volatility Stop Indicator helps define the current trend.  The indicator plots a red line above the prices bars when a downward trend is detected, and a blue line below the bars when an upward trend is detected.  These lines are commonly used as trailing stops.  This indicator is commonly used as a exit tool rather than an entry technique.  When price crosses the VSTOP value, the trend reverses and VSTOP moves to the other side of price.  The VSTOP calculation method can be found above.
RTL Token . . .
The RTL Token for the Volatility Stop indicator is VSTOP.  A common system for trading the VSTOP might be to look for closing price crossing VSTOP:

Long...
CL > VSTOP AND CL.1 <= VSTOP

Short...
CL < VSTOP AND CL.1 >= VSTOP