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Depending on how short "short term" is, you might want to consider
a stop that trails a certain number of ATRs above or below the last
bar's close. A neat idea from Chuck LeBeau is the ATR Ratchet,
which works like a parabolic. I have pasted information on the ATR
Ratchet below.
If you're really short term, you might need to drop down to a shorter
time frame or just rely on a reversal signal.
----- Original Message -----
From: "Hengy" <hengy@xxxxxxxxxxxxxxxx>
To: <metastock@xxxxxxxxxxxxx>
Sent: Sunday, August 26, 2001 7:17 PM
Subject: STVBO System
> I'm working on coding a short term volatility breakout system but am having
> trouble deciding on a method for taking profits. Because this system trades
> often for small amounts I would like to eek out as much as possible on each
> trade. I could work with profit targets but am afraid of leaving too much
> on the table. Anyone have any suggestions?
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The Traderclub Forum: Traders Club Bulletins: Bulletin 47
ATR Ratchet
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By webmaster (Admin) on Saturday, July 21, 2001 - 01:31 pm:
BULLETIN #47
A New Exit Strategy - The ATR Ratchet By Chuck LeBeau
Recently I've been doing quite a bit of research on new
systems for stock trading. The research is on behalf of a
new hedge fund that will be starting later this year. The
fund will be managed by Tan LeBeau LLC, the company that
funded this research project. After some serious internal
discussion about the advantages of keeping this new exit
strategy a company secret, the LLC has graciously given me
permission to share this discovery with our System Traders
Club members. Here is a bit of background on how the new
exit strategy came about.
In the process of testing various exit strategies for our
stock trading systems we found that we needed a
profit-taking exit that performed somewhat along the lines
of the Parabolic SAR but that could be made more flexible
and easier to code and apply. We found that the Parabolic
was hard to use because it was often on the opposite side of
the market from our trades or it was starting from a point
that was too low for what we wanted. After spending a great
deal of time with the Parabolic we decided it was not
helpful for the particular systems we were creating. As an
alternative to the Parabolic exit we decided to test some
new exit ideas based on my extensive work and experience
with the Average True Range. After a great deal of tinkering
and experimentation we were pleased to learn that the new
exit strategy worked surprisingly well for profit taking and
had many very useful features and applications. I decided
to name this new exit strategy the "ATR Ratchet".
The basic idea is quite simple. We first pick a logical
starting point and then add daily units of ATR to the
starting point to produce a trailing stop that moves
consistently higher while also adapting to changes in
volatility. The advantage of this strategy over the
original Parabolic based exit is that when using the ATR
Ratchet we have much more control of the starting point and
the acceleration. We also found that the ATR based exit has
a fast and appropriate reaction to changes in volatility
that will enable us to lock in more profit than most
conventional trailing exits.
Here is an example of the strategy: After the trade has
reached a profit target of at least one ATR or more, we pick
a recent low point (such as the lowest low of the last ten
days). Then we add some small daily unit of ATR (0.05 ATR
for example) to that low point for each day in the trade.
If we have been in the trade for 15 days we would multiply
0.05 ATRs by 15 days and add the resulting 0.75 ATRs to the
starting point. After 20 days in the trade we would now be
adding 1.0 ATRs (.05 times 20) to the lowest low of the last
ten days. The ATR Ratchet is very simple in its logic but
you will quickly discover that there are lots of moving
parts that perform a lot of interesting and useful
functions; much more than we expected.
We particularly like this strategy because, unlike the
Parabolic, the ATR Ratchet can easily be implemented any
time we want during the trade. We can start implementing
the stop the very first day of the trade or we can wait
until some specific event prompts us to implement a
profit-taking exit. I would suggest waiting to use the exit
until some minimum level of profitability has been reached
because, as you will see, this stop has a way of moving up
very rapidly under favorable market conditions.
The ATR Ratchet begins very quietly and moves up steadily
each day because we are adding one small unit of ATR for
each bar in the trade. However the starting point from
which the stop is being calculated (the 10 day low in our
example) also moves up on a regular basis as long as the
market is headed in the right direction. So now we have a
constantly increasing number of units of ATR being added to
a constantly rising ten day low. Each time the 10-day low
increases our ATR Ratchet moves higher so we typically have
a small but steady increase in the daily stop followed by
much larger jumps as the 10 day low moves higher. It is
important to emphasize that we are constantly adding our
daily acceleration to an upward moving starting point that
produces a unique dual acceleration feature for this exit.
We have a rising stop that is being accelerated by both time
and price. In addition, the ATR Ratchet will often add
substantial additional acceleration in response to increases
in volatility during the trade.
The acceleration due to range expansions is an important
feature of the ATR Ratchet. Because markets often tend to
show wider ranges as the trend accelerates the ATR will tend
to expand very rapidly during our best profit runs. In a
fast moving market you will typically find many gaps and
large range bars. Because we are adding multiple units of
ATR to our starting point, any increase in the size of the
underlying ATR causes the stop to suddenly make a very large
jump that brings it closer to the high point of the trade.
If we have been in the trade for forty days any increase in
the ATR will have a forty-fold impact on the cumulative
daily acceleration. That is exactly what we want it to do.
We found that when a market was making a good profit run the
ATR Ratchet moved up surprisingly fast and did an excellent
job of locking in open profits.
Keep in mind that this exit strategy is a new one (even to
us) so our experience and observations about it are still
very limited. However I am going to discuss a few
observations about the variables that might help you to
understand and apply this exit successfully.
Starting Price: One of the nice features about the ATR
Ratchet is that we can start it any place we want. For
example we can start it at some significant low point just
as the Parabolic does. Or we can start it at a swing low, a
support level, and a channel low or at our entry point minus
some ATR unit. If we wait until the trade is fairly
profitable we could start it at the entry point or even
somewhere above our entry point. The possible starting
points are unlimited; use your imagination and your logic to
find a starting point that makes sense for your time frame
and for what you want your system to accomplish. Our idea
of starting the Ratchet from the x day low makes it move up
faster than a fixed starting point (as in the Parabolic)
because the starting point rises repeatedly in a strong
market. If you prefer, you could just as easily start the
Ratchet at something like 2 ATRs below the entry price and
then the starting point would remain fixed. In this case
the Ratchet would move up only as the result of accumulating
additional time in the trade and as the result of possible
expansions of the ATR itself.
When to Start: We can very easily initiate the exit strategy
based on time rather than price or combine the two ideas.
For example, we can start the exit only after the trade has
been open for at least 10 days and is profitable by more
than one ATR. My general impression at this point is that
it is best to implement the ATR Ratchet only after a fairly
large profit objective has been reached. The ATR Ratchet
looks like a very good profit taking exit but I suspect it
will kick you out of a trade much too soon if you start it
before the trade is profitable.
As I mentioned, one of the things I like best about the ATR
Ratchet is its flexibility and adaptability. Here is
another idea on how to start it. We can start it after
fifteen bars but we don't necessarily have to add fifteen
ratchets. The logic for the coding would be to start the
Ratchet after 15 bars in the trade but multiply the ATR
units by the number of bars in the trade minus ten or divide
the number of days in the trade by some constant before
multiplying the ATR units. This procedure will reduce the
number of ratchets, particularly at the beginning of the
trade when the exit is first implemented. Play around with
the ATR Ratchet and see what creative ideas you can come up
with.
Daily Ratchet Amount: After testing it the daily Ratchet
amount we chose when we were first doing our research turned
out to be much too large for our intended application. The
large Ratchet amount (percentage of ATR) moved the stop up
too fast for the time frame we wanted to trade. After some
trial and error we found that a Ratchet amount in the
neighborhood of 0.05 or 0.10 (5% or 10% of one 20-day
average true range) multiplied by the number of bars the
trade has been open will move the stop up much faster than
you might expect.
As a variation on this strategy the very small initial
Ratchet can always be increased later in the trade once the
profits are very high. We could start with a small Ratchet
and then after a large amount of profit we could use a
larger daily Ratchet increment. There are all sorts of
interesting possibilities.
ATR Length: As we have learned in our previous uses of ATR,
the length that we use to average the ranges can be very
important. If we want the ATR to be highly responsive to
short term variations in the size of the range we should use
a short length for the average (4 or 5 bars). If we want a
smoother ATR with less reaction to one or two days of
unusual volatility we should use a longer average (20 to 50
bars). For most of my work with the ATR I use 20 days for
the average unless I have a good reason to make it more or
less sensitive.
Summary: We have just scratched the surface on our
understanding of the possibilities and variations of the ATR
Ratchet as a profit taking tool. We particularly like the
flexibility it offers and we suspect that each trader will
wind up using a slightly different variation. As you can
see, there are many important variables to tinker with. Be
sure to code the Ratchet so it gets plotted on a chart when
your are first learning and experimenting with it. The ATR
Ratchet is full of pleasant surprises and the plot on the
chart will quickly teach you a great deal about its unusual
characteristics.
Be sure to let us know if you come up with any exciting
ideas on how to apply it.
Good luck and good trading.
* * * * * * * September Workshop reservations now being
accepted.
Learn How to Design, Test, Evaluate and Implement Profitable
Trading Systems. Whatever your market and whatever your
time frame you are certain to benefit from this carefully
prepared two-day workshop. On September 15th and 16th Chuck
LeBeau will personally teach a small group of traders the
step by step process of how to design better trading
systems.
It doesn't matter if you trade stocks or futures or if you
are a day trader or a position trader. The procedures that
need to be followed are the same and you will learn what you
need to know to improve your systems at this informative
Workshop.
Contact Chuck LeBeau at (310) 265- 9776 for more information
or go to: http://www.traderclub.com/workshop.htm
* * * * * * * * Visit our FORUM discussion group and share
ideas with other traders.
The Traders Club Forum is the best discussion group for
traders anywhere on the web. We have many lively and
informative threads going that will increase your knowledge
and generate ideas. If you are new and need questions
answered this is the place. You will find that our Club
members are knowledgeable and very helpful. It's a very
friendly and supportive group and you will be surprised at
the amount of information and assistance that is available.
The discussions are very high quality and best of all - IT'S
FREE.
Just go to http://www.traderclub.com/discus/board.html and
take a look.
If you need more information send email to:
chuck@xxxxxxxxxxxxxx
Chuck Le Beau's System Traders Club
http://www.traderclub.com
ph 310-265-9776
fax 310-265-9556
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