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Sounds good. Might you also want to set an upper limit too? Reduce risk by
removing excessively volatile stocks.
Have you tried greater than 20 periods ? or a lower limit greater than 4%?
I'm most likely going to be screening the S&P500.
Yes, as you suspected an upper limit would be helpful. It looks like when
the daily volatility gets above 10% that the stock becomes highly erratic in
terms of direction and often corrects.
I'm not sure how important the exact numbers of days to use in the average
might be. Probably at least 20 but not more than 50 would be my best guess.
When trying to filter out the stocks with excessive volatility you might
favor an even shorter average than 20. You could also compare a five day ATR
with a 20 day ATR and when the 5 day is more than 150% of the 20 day average
the stock may be too volatile to trade right now. (Just a guess at those
numbers. Don't count on them and do your own study to figure it out.)
Remember that volatility is also opportunity. The best trading vehicle would
have a combination of high volatility and high directional movement. The
worst trading vehicle would have high volatility with low directional
movement.
Chuck LeBeau
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