2005issue C021
Building entry rules with ratchet volatility stops
The same average-true-range-multiple can lift a close through a recent extreme and place a loss bound. A highest-value window then holds that bound at a peak reading, and a separate smoothed-high line marks a profit-side reference.
- A rule-based-entry test is a boolean close-versus-extreme-plus-volatility check that can mark a buy, mark a sell, or leave the bar unmarked so entry, exit, and abstention stay one procedure.
- A long-side highlight is the close moving above the 20-bar lowest low plus twice a 10-bar average true range; a sell-side highlight is the close moving below the 20-bar highest high plus twice a 10-bar average true range.
- A basic volatility-stop of close minus twice a 10-bar average true range can print lower on later bars, so a 15-bar ratchet-window holds the trailing-stop at the peak reading.
- A profit-reference can be drawn as a 13-bar exponential average of highs plus twice a 10-bar average true range.
One shared distance unit
An average-true-range-multiple is the distance unit that lifts an entry threshold off a recent extreme and sets how far a stop sits from the close. In this construction that unit is twice a 10-bar average true range.
A volatility-stop is a price offset equal to a multiple of average true range, used to place a loss bound before entry and while a position is open.
A close test that can mark or skip a bar
A rule-based-entry step is a boolean close-versus-extreme-plus-volatility test. It can mark a buy, mark a sell, or leave the bar unmarked so entry, exit, and abstention stay one procedure.
A long-side highlight can be written as the close moving above the 20-bar lowest low plus twice a 10-bar average true range.
A sell-side highlight can be written as the close moving below the 20-bar highest high plus twice a 10-bar average true range.
Why a raw stop needs a peak window
A basic volatility stop can be defined as the close minus twice a 10-bar average true range.
That basic volatility stop can print lower values on later bars, which would move the protective level down if left unadjusted.
A trailing-stop is a protective level that can advance with favorable price and be held at a recent peak instead of easing when the raw stop prints lower. A ratchet-window is a highest-value lookback applied to a stop series so the displayed level stays at the peak reading over that window.
A 15-bar highest-value transform can be applied to a stop series so the level is held at the peak reading over those 15 bars. Combining the volatility offset with the 15-bar peak window produces a stop equal to the 15-bar highest value of close minus twice a 10-bar average true range.
A separate profit-side line
A profit-reference is an upper construction line built from a smoothed high plus the same volatility multiple used for the stop.
A separate profit-side line can be defined as a 13-bar exponential average of highs plus twice a 10-bar average true range.
All readings on this track · 12 readings
- 1989A close-only volatility reverse bound to average true range
- 1992Equity-curve average as a live-capital gate
- 1992Constructing volatility-adaptive trailing stops
- 1993Constructing skew-adjusted volatility stops and pyramid size
- 1999Evaluating a long-only breakout system with a volatility stop
- 1999When markets burst, not trend
- 2005Building entry rules with ratchet volatility stops
- 2005Pricing entries, stops and exits in range units
- 2013Constructing asymmetric volatility bands for reversal, trend, and stops
- 2015Mark the stop, the target, and the invalidation line before entry
- 2019Bounding capital risk with phase-aware stops
- 2019Measure the Bollinger Bands touch before adding engulfing and a volatility stop