AN-2: Implementing Volatility Trailing Stops the Simple
Contents
1. Previous Stop NEBAT Infinity Stop Reference Previous Stop Volatility Stop S Band Stop Trigger 1 Band Stop Band Previous 5 Stop m Trigger 0 Copyright 2000 2002 by Compuvision Australia Pty Ltd All Rights Reserved http Awww compuvision com au Page 9 AN 2 Implementing Volatility Trailing Stops the Correct Way Trailing Stop Algorithm on the Short Side The following flowchart illustrates the algorithm used to compute the trailing stop on the short side Current Bar Previous Stop 0 Stop Reference Volatility Next Bar i Previous Stop Stop i Band Stop Trigger 1 Threshold gt Previous Stop No Stop lt Previous Stop No y Band Previous Stop Yes Band Stop m Trigger 0 Indicator Application The following indicator example plots two ATR trailing stop bands on a chart The top band corresponds to the trailing stop on the short side The bottom band corresponds to the trailing stop on the long side Band Indicator Example Period Input Period 3 50 10 ARC Input Average Range Constant 0 5 10 3 Volatility ARC ATR Period Trailing Stop Band Indicator on the Long side BandLong ExtFml TradeSim TrailingStop BAND LONG Volatility CLOSE LOW Copyr2. AN 2 Implementing Volatility Trailing Stops the Correct Way Tradesim Advanced Trading Simulator and Back Tester Application Note 2 Implementing Volatility Trailing Stops the Simple Way v TradeSim Standard Edition v TradeSim Professional Edition v TradeSim Enterprise Edition v Metastock Version 7 and above Last Update 20 July 2005 Copyright 2000 2002 by Compuvision Australia Pty Ltd All Rights Reserved Page 1 http Awww compuvision com au AN 2 Implementing Volatility Trailing Stops the Correct Way Contents ESE E H SE O EE E T E E E E E E 2 DISCLAIMER EE ESAS OE EEE E ANE E COPYRIGHT AND LICENSING AGREEMENT eesssossssesssesssocesoossoossoossssesssocssoossooessossssessseessse F Trademarks ccsccssssssssssssssssesssessssescseessesessseesseesseessessassssssessseassecsssessssessssessesssssssssecssoees O Introduction cscsccsrsscssecssssesscsecsesesrsvessecsscssessecssesessssecsessoreee sesvesseceseeveee O Volatility trailing stop on the long Side sscsscssscescssscsssssssssssrsecsesssessseesesssesssseseneseneseessonse 6 Trailing Stop Band 2233 iinn enon e n be esd es catalan E AA R EA EENT EEE EO ERN 6 EX It CONGIEOM aisa r Ea EA aE NE van e AAE EEE A A E aa eas 7 Volatility trailing stop on the short Side ssscsscssscsscsssssssssesssesssesssscsssssesssesessesssesssessesseese 7 Trailing Stop Batid a coc i ee oh ea ee Ne Sat et eae E E EE A 7 Heh
3. pi hes J Le i ixit S a Hond J rf mf Exitong K Exit Long Trailing Stop Band on the long side xit Lon 11 Exit Long Hiu Exit Short Triggers gt Exit Long Triggers A if Metastock by Equis 2001 Created with Creating Other Trailing Stop Indicators The Trailing Stop external function is not limited to creating ATR style trailing stop functions only You can quite easily use other functions such as standard deviation or even moving averages to construct a different style of trailing stop The idea is to use a function that represents the volatility of the underlying security The following example shows how to create a Two Standard Deviation Trailing Stop function using the external TrailingStop function Two Standard Deviation Trailing Stop Exit on the Long side Volatility 2 Stdev CLOSE 10 BandLong ExtFml TradeSim TrailingStop Copyright 2000 2002 by Compuvision Australia Pty Ltd All Rights Reserved Page 13 http www compuvision com au AN 2 Implementing Volatility Trailing Stops the Correct Way BAND LONG Volatility CLOSE LOW Putting it all together The following example illustrates the use of the Trailing Stop function in a complete trade database exploration for long trades only Period 10 ARC 3 Average Range Constant Volatility ARC ATR Period EntryTrigger Cross MACD Mov MACD 9 E EntryPrice CLOSE
4. 4 C50 08 EEAO a RPTE ae ate E A eR OY 7 Using the Trailing Stop with the RecordTrades function ccsccsscsssessesssessssssssesesesssesseeseeee 8 Fast Trailing Stop External Function sccsscsscsscssscecsssccsccssscccsessercscssesscscesccssssssesssseese S Function Description sscssccssessccsscssssssssssessssssssssssssscsssssssssssssssnsesnsessssssesessnesssessosssessnsesoessonse Trailing Stop Algorithm on the Long Side Trailing Stop Algorithm on the Short Side Indicator Application lt scscseceoseseecsennnssbcdcesenssoudsenssoonssecessdsoescounssdnccseveassownsenssesnosesduse soesosennsssesensans Band Indicator Example cceeee Exit Trigger FUnctions ssccsscsssseees Exit Trigger Indicator example Creating Other Trailing Stop Indicators Putting it all together csscsscsssecssecsesssessesssessssseescssscssessecssesssensesssessssesesessnesssessesssonsecnseessees REFERENCE LITERATURE cstvssccasessdsssiiagayssnendssusauessvanysensssoniabsocnesssavnsseatascosuestoessseourcsversse LO Copyright 2000 2002 by Compuvision Australia Pty Ltd All Rights Reserved Page 2 http Awww compuvision com au AN 2 Implementing Volatility Trailing Stops the Correct Way Disclaimer In no event shall Compuvision Australia or its suppliers be liable for any damage either direct or indirect including without limitation damages for loss of busine
5. Trailing Stop Exit on the Long side ExitTrigger ExtFml TradeSim TrailingStop TRIGGER LONG Volatility CLOSE LOW ExitPrice CLOSE InitialStop 0 optional initial stop ExtFml TradeSim Initialize Initialize internal variables ExtFml TradeSim RecordTrades Trailing Stop Example Trade Data Filename LONG Trade Position Type EntryTrigger Entry Trigger EntryPrice Entry Price InitialStop Initial Stop ExitTrigger Exit Trigger ExitPrice Exit Price START Trade Recorder Control Copyright 2000 2002 by Compuvision Australia Pty Ltd All Rights Reserved Page 14 http Awww compuvision com au AN 2 Implementing Volatility Trailing Stops the Correct Way Copyright 2000 2002 by Compuvision Australia Pty Ltd All Rights Reserved Page 15 http Awww compuvision com au AN 2 Implementing Volatility Trailing Stops the Correct Way Reference Literature This list of references is by no means exhaustive but represents material which is either recommended or for general reading 1 Compuvision Australia TradeSim User Manual 2 Equis Metastock for Windows 95 98 amp NT This is the user manual that comes with Metastock Version 7 0 and is a prerequisite for using TradeSim Copyright 2000 2002 by Compuvision Australia Pty Ltd All Rights Reserved Page 16 http Awww compuvision com au
6. license agreement the Software can only be used by those persons or entities that have purchased a license key Payment information is available at http www compuvision com au PurchaseOnline htm The Software is provided as is In no event shall Compuvision Australia Pty Ltd be liable for any consequential special incidental or indirect damages of any kind arising out of the delivery performance or use of this Software to the maximum extent permitted by applicable law While the Software has been developed with great care it is not possible to warrant that the Software is error free The Software is not designed nor intended to be used in any activity that may cause personal injury death or any other severe damage or loss When errors are found in the Software the Vendor will release a new version of the Software that may no longer contains those errors a reasonable amount of time after the Vendor is given an accurate description of those errors Which amount of time is reasonable will depend on the complexity and severity of the errors The Vendor will mention the release at http www compuvision com au at the Vendor s option directly contact the Licensee to announce the new release The Licensee can then at their option upgrade to the latest version or to continue to use the older version the Licensee already has In the latter case the Licensee will no longer be entitled to technical support until the Licensee has upgraded to the la
7. ce Trademarks TradeSim is a registered trademark of Compuvision Australia Pty Ltd Metastock is a registered trademark of Equis International Microsoft Windows is a registered trademark of Microsoft Corporation Microsoft Excel is a registered trademark of Microsoft Corporation Word for Windows is a registered trademark of Microsoft Corporation TradeStation is a registered trademark of Omega Research Corporation DS Ore Gs Bo Copyright 2000 2002 by Compuvision Australia Pty Ltd All Rights Reserved Page 5 http Awww compuvision com au AN 2 Implementing Volatility Trailing Stops the Correct Way Introduction Volatility trailing stops are useful in developing a trading system which adheres to strict money management guidelines The main benefits of a trailing stop is that the stop moves in favour of the trade whilst minimising risk and maximising profits The volatility trailing stop is usually used in risked based position size models This type of stop has a three fold purpose Firstly it is used to establish an initial risk or money management stop Secondly the initial risk is used to derive the position size for the trade Thirdly the trailing stop is used to protect capital of the trade whilst minimising risk and maximising profit An example of its use as an indicator is shown below Note that the bands precede the exit conditions by one bar This is because the exit conditions reference the prev
8. e external function along with the name of the external DLL that contains it The Mode parameter determines whether the function is used to generate a trailing stop band indicator or a binary stop trigger function The TradePosition parameter specifies whether the trade is on the long or short side The VolatilityFunction parameter is a user 4 defined volatility function for determining the type of trailing stop The RefPoint parameter determines the point or price where the trailing stop is calculated It is typically set to the closing price however it could be set to HIGH for the long side or to LOW for the short side The ThresholdPoint parameter determines the point at which the stop band has been breached and the the trailing stop band is reset Trailing Stop Algorithm on the Long Side Allowable Values TradeSim TrailingStop BAND displays a Trailing Stop band indicator TRIGGER generates a binary trigger where a value of 1 indicates a stop trigger LONG or SHORT For example 3 ATR 10 gives a 10 bar ATR trailing stop with an average range constant of 3 CLOSE OPEN HIGH LOW or any arbitrary data array LOW CLOSE HIGH or any arbitrary data array Typically you would use LOW for the long side and HIGH for the side short side The following flowchart illustrates the algorithm used to compute the trailing stop on the long side Current Bar l
9. ight 2000 2002 by Compuvision Australia Pty Ltd All Rights Reserved http Awww compuvision com au Page 10 AN 2 Implementing Volatility Trailing Stops the Correct Way Trailing Stop Band Indicator on the Short side BandShort ExtFml TradeSim TrailingStop BAND SHORT Volatility CLOSE HIGH Display the bands BandLong BandShort mMeditech ASX TradeSim Test TrailingStop ly ee LaL Tt To 1 pytt l 045 Bott i J IH 0 45 0 40 J i ly H 0 40 0 95 my I Trailing Stop Band on the long side 0 35 Created with Metastock by Equis 2001 When overlaying the above indicator on the chart the bands appear to pre empt the stop triggers This is perfectly normal as the trigger condition is not known until the next day You can shift the bands one bar to the right to match up the crossing of the band with the trigger condition by replacing the last two lines with the following lines Ref BandLong 1 Ref BandShort 1 Copyright 2000 2002 by Compuvision Australia Pty Ltd All Rights Reserved Page 11 http Awww compuvision com au AN 2 Implementing Volatility Trailing Stops the Correct Way Exit Trigger Functions When the Mode parameter in the trailing stop function is set to TRIGGER the function returns a binary value based on a stop trigger event When TradePosition LONG a value of 1 indicates an exit on the long side It is equivalent to writing the BandLong indicato
10. ious days trailing stop value This reason for this will become clearer later when we discuss the indicators in a bit more detail m BROKEN HILL DGS VTS Bands ojx Trailing stop band on the short side Trailing stop band on the long side Volatility trailing stops can be implemented using the Metastock indicator language However the use of the PREV function in defining this indicator pays a considerable penalty regarding computation speed so bare this in mind if you decide to use these types of stops in your indicators Volatility trailing stop on the long side Trailing stop band The following indicator formula defines a volatility trailing stop band on the long side Period 10 ATR period ARC 3 0 Average range constant Stop C ARC ATR Period BandLong If L lt PREV is stop reached Copyright 2000 2002 by Compuvision Australia Pty Ltd All Rights Reserved Page 6 http Awww compuvision com au AN 2 Implementing Volatility Trailing Stops the Correct Way Stop yes restart plot If Stop gt PREV no if new stop gt prev stop Stop yes plot new higher stop PREV no plot previous stop The BandLong formula above can be condensed into one line as follows BandLong If L lt PREV Stop If Stop gt PREV Stop PREV The ATR period defines the interval for which the Wilders Average True Range function is computed Different values can be used depending on the market cond
11. itions Slowly changing markets would benefit from using a longer period However a 10 bar period is a fairly good compromise The Average Range Constant ARC can be adjusted according to market conditions Values between 1 8 and 3 0 should be used A too lower value for the ARC should be avoided because it will whipsaw you in and out of the market too often Very large values of the ARC should be avoided because you will not get stopped out in time and most of the profit will be lost The aim is to try to protect capital and maximize profits without being whipsawed out of the markets too often Exit condition The indicator above generates a trailing stop band on the long side An exit condition is generated on the day when the low of the day crosses the stop band of the following day To write this as an indicator we need to use the REF function to reference the stop band from the previous day The following indicator demonstrates how this is done ExitLong L lt ref BandLong 1 Volatility trailing stop on the short side Trailing Stop Band The following indicator formula defines a volatility trailing stop on the short side Period 10 ARC 3 Stop C ARC ATR Period BandShort If H gt PREV is stop reached Stop yes restart plot If Stop lt PREV no if new stop gt prev stop Stop yes plot new stop PREV no plot previous stop The BandShort formula above can be condensed into one
12. line as follows BandShort If H gt PREV Stop If Stop lt PREV Stop PREV Exit Condition The indicator above generates a trailing stop band on the short side An exit condition is generated on the day when the high of the day crosses the stop band of the following day To write this as an indicator we Copyright 2000 2002 by Compuvision Australia Pty Ltd All Rights Reserved Page 7 http Awww compuvision com au AN 2 Implementing Volatility Trailing Stops the Correct Way need to use the REF function to reference the stop band from the previous day The following indicator demonstrates how this is done ExitShort H gt ref BandShort 1 Using the Trailing Stop with the RecordTrades function To use the trailing stop with the RecordTrades function is fairly straightforward The example below illustrates the use of the trailing stop on the long side EntryTrigger Cross MACD Mov MACD 9 E EntryPrice CLOSE ExitTrigger L lt ref BandLong 1 ExitPrice CLOSE InitialStop BandLong The following example below illustrates the use of the trailing stop on the short side EntryTrigger Cross Mov MACD 9 E MACD EntryPrice CLOSE ExitTrigger H gt ref BandShort 1 ExitPrice CLOSE InitialStop BandShort Fast Trailing Stop External Function In the previous section we used the Metastock indicator language to construct a trailing stop f
13. olatility Trailing Stops the Correct Way Copyright and Licensing Agreement TradeSim is Copyright 2000 2003 by Compuvision Australia Pty Ltd TradeSim is a trademark of Compuvision Australia Pty Ltd IMPORTANT READ CAREFULLY This license statement and limited warranty constitutes a legal agreement License Agreement between you Licensee either as an individual or a single entity and Compuvision Australia Pty Ltd Vendor for the software product TradeSim Software of which Compuvision Australia Pty Ltd is the copyright holder BY INSTALLING COPYING OR OTHERWISE USING THE SOFTWARE YOU AGREE TO BE BOUND BY ALL OF THE TERMS AND CONDITIONS OF THE LICENSE AGREEMENT Upon your acceptance of the terms and conditions of the License Agreement Compuvision Australia Pty Ltd grants you the right to use the Software in the manner provided below If you do not accept the terms and conditions of the License Agreement you are to promptly delete each and any copy of the Software from your computer s This license agreement only applies to the software product TradeSim and not to any other product even if that product is similar to TradeSim and has a similar name The Vendor reserves the right to license the same Software to other individuals or entities under a different license agreement After accepting this license agreement the Licensee is permitted to use the Software under the terms of this agreement Under this
14. r above as follows ExitLong ThresholdPoint lt ref BandLong 1 Typically you set ThresholdPoint to be LOW When TradePosition SHORT a value of 1 indicates an exit on the short side It is equivalent to writing the BandShort indicator above as follows ExitShort ThresholdPoint gt ref BandShort 1 Typically you set ThresholdPoint to be HIGH Exit Trigger Indicator example The following example uses the Trailing Stop function to plot a binary waveform To distinguish the ExitLong from the ExitShort trigger the ExitLong trigger is negated so that it appears as a 1 on the chart in red whereas an ExitShort trigger appears as a 1 on the chart in blue Period Input Period 3 50 10 ARC Input Average Range Constant 0 5 10 3 Volatility ARC ATR Period Trailing Stop Exit on the Long side ExitLong ExtFml TradeSim TrailingStop TRIGGER LONG Volatility CLOSE LOW Trailing Stop Exit on the Short side ExitShort tExtFml TradeSim TrailingStop TRIGGER SHORT Volatility CLOSE HIGH Copyright 2000 2002 by Compuvision Australia Pty Ltd All Rights Reserved Page 12 http Awww compuvision com au AN 2 Implementing Volatility Trailing Stops the Correct Way Plot the triggers ExitLong ExitShort mMeditech ASX TradeSim Test TrailingStop Exit Short t 4 Trailing Stop Band on the short side Exit Shart I t i hh hd jA li i T
15. ss profits business interruption loss or business information or other losses arising out of the use of or inability to use the software The results obtained from using this software are not indicative of and have no bearing on any results which may be attained in actual trading Results of past performance are no guarantee of future performance It should not be assumed that you would experience results comparable to that reflected by the results from this software No assurance is given that you will not incur substantial losses nor shall Compuvision Australia Pty Ltd be held liable if losses are incurred Compuvision Australia Pty Ltd is not a licensed investment advisor and so the information and results obtained by using this software is for educational purposes and of the nature of a general comment and neither purports nor intends to be specific trading advice The information obtained from using this software should not be considered as an offer or enticement to buy sell or trade and is given without regard to any particular person s investment objectives financial situation and particular needs This software is not designed to replace your Licensed Financial Consultant or your Stockbroker You should seek appropriate advice from your broker or licensed investment advisor before taking any action Copyright 2000 2002 by Compuvision Australia Pty Ltd All Rights Reserved Page 3 http Awww compuvision com au AN 2 Implementing V
16. test version The Vendor reserves the right to charge an upgrade fee in the case of major new enhancements or additions to the Software This major new version will then start a new version line which will use version numbers Copyright 2000 2002 by Compuvision Australia Pty Ltd All Rights Reserved Page 4 http Awww compuvision com au AN 2 Implementing Volatility Trailing Stops the Correct Way clearly distinguishable from the old version line The Licensee has no obligation to upgrade to the new version line You must not attempt to reverse compile modify translate or disassemble the Software in whole or in part You must not run the Software under a debugger or similar tool allowing you to inspect the inner workings of the Software The Software remains the exclusive property of the Vendor Any Licensee which fully complies with the terms in this license agreement may use it according to the terms of this license agreement You must not give copies of the Software or your license key to other persons or entities If you have received a download password or an URL with an embedded password for downloading the Software you must keep this password secret You must also take reasonable steps to prevent any third party from copying the software from one of your machines without your permission The Vendor reserves the right to revoke your license if you violate any or all of the terms of this license agreement without prior noti
17. unction One shortcoming of this trailing stop is the use of the notoriously slow PREV function which is used no less than three times in the trailing stop indicator This may not be a problem when overlaying the indicator on a single chart but doing a Trade Database exploration containing hundreds of securities with a maximum of ten thousand records loaded for each security can tax the computers capabilities quite dramatically so much so that it can take quite along time to complete an exploration To overcome the speed problem the external Plug In contains a hard coded shell of a primitive trailing stop function The advantage of hard coding this function is that it no longer relies on the PREV function but will still allow the user to use the Metastock indicator language to construct the type of trailing stop function so it is not just limited to the popular ATR type of trailing stop Function Description The external trailing stop function shell takes on the following syntax ExtFml1 TradeSim TrailingStop 1 Name of external function Mode 2 Mode TradePosition 3 Trade Position Type VolatilityFunction 4 Volatility Function RefPoint 5 Reference Point ThresholdPoint 6 Threshold Point Copyright 2000 2002 by Compuvision Australia Pty Ltd All Rights Reserved Page 8 http Awww compuvision com au AN 2 Implementing Volatility Trailing Stops the Correct Way Parameter Description _ The name of th
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