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2010issue C0610-15

Use the session-range percent stop as a pre-trade filter

The archive converts recent session volatility into a percent-of-range Stop-loss order that widens or tightens with Average daily range. Editorial: treat that stop as a pre-trade filter and accept a day trade only if the distance still keeps equity exposure inside a chosen bound.

  • Volatility is uncertainty about future price change, so larger fluctuations raise risk unless stop distance and exposure are reset to the current range.
  • Stops and targets set as a percentage of recent Average true range or Average daily range widen when that measure is high and tighten when it is low.
  • A conservative day-session pair uses 10 percent of Average daily range as the Stop-loss order and 15 percent as the profit target, and those exits may need to be recalculated daily.
  • Editorial: convert recent session volatility into a Percent volatility stop first, then accept the day trade only if ATR position sizing still keeps equity exposure inside a chosen bound.
Entries in this reading3 entries
Percent volatility stop1 readingCurrent trackATR position sizing43 readingsStop-loss order147 readings

Start with the session range, not a fixed-point stop

Volatility is described as uncertainty about future price change. Larger fluctuations raise risk unless stop distance and exposure are reset to the current range.

The archive converts recent session volatility into a Percent volatility stop. Stops and targets set as a percentage of recent Average true range or Average daily range widen when that volatility measure is high and tighten when it is low.

How Average true range and Average daily range differ

True range is the largest of the current high-low span and the two absolute gaps from the prior close to today's high and low. Average true range is a moving average of that True range series.

A 14-period Average true range lookback is the standard setting. A shorter lookback tracks the immediate trend more closely, while a longer lookback is smoother and more representative of the longer trend.

Average daily range is the seven-session mean of each session high minus that session low and omits gaps, so it is typically smaller than Average true range. It is meant to represent volatility inside the day session.

A conservative percent-of-range pair

One conservative day-session pair uses 10 percent of Average daily range as the Stop-loss order and 15 percent of Average daily range as the profit target.

A seven-day Average daily range of 16 points produced rounded exits of 1.50 points for the stop and 2.50 points for the target. A 91.75-point Average daily range produced 9.25 and 13.75 points. A fixed-point stop from the quiet week would not have matched the wide-range week.

Because each session's range changes the Average daily range, the percent-of-range stop and target may need to be recalculated daily before the next session.

A worked short example

In a worked short example with a 1.50-point percent-of-range stop, an entry at 887.75 was paired with a Stop-loss order at 889.25 and a profit target at 885.50.

E-mini S&P 500 session ranges in the two ADR lookbacks

Each bar is one pit-session high-to-low range from the author's two seven-day lookbacks. The October 2008 cluster is several times larger than the June 2009 cluster, which is why a 10 percent ADR stop prints at 9.25 points after the crisis week and only 1.50 points after the quiet week. The heights are the tabulated session highs and lows in the article, not a tracing of the weekly VIX pane on that page.
Each bar is one pit-session high-to-low range from the author's two seven-day lookbacks. The October 2008 cluster is several times larger than the June 2009 cluster, which is why a 10 percent ADR stop prints at 9.25 points after the crisis week and only 1.50 points after the quiet week. The heights are the tabulated session highs and lows in the article, not a tracing of the weekly VIX pane on that page.E-mini S&P 500 · Daily session · 2008-10-16T00:00:00.000Z to 2009-06-30T00:00:00.000Z

Average daily range is the mean of seven session high–low ranges and ignores overnight gaps. Stops and targets in the article are 10 percent and 15 percent of that average, rounded to the nearest quarter point. The weekly VIX screenshot has no printed vertical scale except the final 29.88 print, so that pane was not digitized.

Educational research material, not investment advice. Historical source context does not establish present-day performance.
16 of 36 in the ATR position sizing track
201140-42 pp.Next on ATR position sizingOCA exit groups, trailing limits, and ATR stopsA protective stop is treated as a precondition of entry because trade size is limited by the distance from the entry price to that stop.
All readings on this track · 36 readings
  1. 1988Constructing unsigned true range for directional models
  2. 1989Evaluate an always-in ATR breakout as one procedure
  3. 1992Variable lookback and average true range as a trend-filter construction
  4. 1993A random-walk index that uses true range as its scale
  5. 1993A shared harness for trend-filter construction
  6. 1998Finish a trend with a volatility trail, wave permission, and a slower-frame veto
  7. 1999A trend filter that switches tactics and scales ATR targets
  8. 2001Filter higher lows with linear regression, then judge the exit
  9. 2003A Mechanical trading system is a maintained procedure, not only an entry trigger
  10. 2005Construction of a volatility-bounded long entry
  11. 2005Six-zone encoding of open, high, low, and close
  12. 2006Normalized average true range as a pre-entry volatility bound
  13. 2006Chandelier exits, ATR position sizing, and trailing stops
  14. 2007Constructing a rule-based entry with Relative Strength Index and ATR position sizing
  15. 2008Constructing a zero-lag TMA and heikin-ashi crossover as a complete rule set
  16. 2010Use the session-range percent stop as a pre-trade filter
  17. 2011OCA exit groups, trailing limits, and ATR stops
  18. 2011ATR bands around support and resistance for stops and targets
  19. 2013Algorithmic head-and-shoulders construction with bounded exits
  20. 2013Constructing ATR-scaled swing pivots and linear-regression divergence
  21. 2013Constructing volatility bands from typical price
  22. 2014Constructing true-range contraction filters before expansion
  23. 2015Constructing touch plans from modified true range
  24. 2015One checklist for breakout entry and ATR risk
  25. 2015Percentage true-range construction for cross-market volatility filters
  26. 2015Construct a percentage true range for cross-market volatility
  27. 2015Percentage true range as a pre-entry exposure filter
  28. 2016Constructing ATR-filtered breakout entries
  29. 2017A dividend date as a pairs-trading classroom
  30. 2018Range-based volatility as a true-range construction
  31. 2018Moving average support and volatility-band construction
  32. 2018Construct a lifecycle breakout from compression
  33. 2018Pair the book first and let volatility or range set the size
  34. 2019Trend systems need a no-trade rule
  35. 2020Average true range as a shared unit for size, pairs, and stops
  36. 2020Volatility sizing and target-risk leverage as a pre-trade gate
By fieldStops and loss limits43 readingsBy year201077 readings
All 43 readings tagged ATR position sizing
Also on ATR position sizing5 readings
2001Filter higher lows with linear regression, then judge the exit2002Constructing volatility stops from average true range and parabolic SAR2013Constructing volatility bands from typical price1988Constructing unsigned true range for directional models1989A close-only volatility reverse bound to average true range