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1998issue C091-3

Finish a trend with a volatility trail, wave permission, and a slower-frame veto

A trend is finished only when a scaled true-range trail can name direction, a wave test can grant or refuse the next entry, and a slower frame can force abstention. This archive note reconstructs that historical workflow as one procedure.

  • The volatility trail is a 21-period weighted average of true range, overweighting the latest bar and then multiplied by 3, plotted as a stop-and-reverse envelope.
  • In a rise the measure is subtracted from the highest close of that rise and is not reset by later lower closes. A close through that bound reverses the construction onto the lowest close.
  • Wave permission allows only upwaves after an up definition and only downwaves after a down definition. A counterwave alert does not cancel the next same-direction entry.
  • A higher time frame is used only to name direction, so entries on a substantially lower time frame are taken solely that way.
Entries in this reading3 entries
Current trackATR position sizing43 readingsTrend following93 readingsRule-based entry179 readings

Trend as a built object

Editorial view: trend is not a slogan. The system is finished only when a scaled true-range trail can name direction, a wave test can grant or refuse the next entry, and a slower frame can force abstention.

The paragraphs that follow record the historical workflow. They do not state a present-day forecast or a trading recommendation.

The volatility trail

True range is the largest of the current high-low difference, the current high versus the prior close, and the current low versus the prior close.

The volatility measure is built as a 21-period weighted average of true range, with heavier weight on the latest bar, then multiplied by 3. That scaled distance is the volatility trail, plotted as a stop-and-reverse envelope.

The same scaled true-range distance is the stop-and-reverse bound. It is computed before entry and while the position is open so the loss threshold tracks current volatility.

How direction is named

In a rise the measure is subtracted from the highest close of that rise and is not reset by later lower closes. A close through that bound reverses the construction, so the same measure is added to the lowest close until a close back through the trail.

Direction is labeled up while the volatility trail sits below the market and down while the trail sits above the market.

Trend-following, in this construction, means stay on the side named by the volatility trail and take only same-direction waves for the system holding period.

Wave permission and the counterwave alert

Entries are restricted to buying upwaves only after an up definition is in force and selling downwaves only after a down definition is in force. That is wave permission: only upwaves after an up definition, only downwaves after a down definition.

A break of the prior opposing wave is only a counterwave alert that direction may change. The next same-direction wave is still taken. The alert is cancelled if that wave recaptures the prior same-direction extreme.

The slower-frame veto

A higher time frame is used only to establish direction. Entries are sought on a substantially lower time frame solely in that same direction.

Paired frames offered as examples include 15-minute versus 60-minute, daily versus weekly, and weekly versus monthly, provided the two frames differ substantially.

One procedure for enter, reverse, and stand aside

The construction is one procedure. It states when to enter, when to reverse, and when to stand aside from a counter-wave or a conflicting slower-frame direction.

The volatility trail names the side. Wave permission grants or refuses the next wave. The slower-frame veto can force abstention when the higher frame disagrees.

Chase Manhattan daily with 3× ATR volatility trail

Daily Chase Manhattan from late 1996 into mid-November 1997. The orange 21-period weighted true-range trail, scaled by three, sits under price through the long advance and only flips above after the November 1997 break, which is how Abraham names the uptrend. Prices and the trail were read off the TradeStation plot, not from a printed table.
Daily Chase Manhattan from late 1996 into mid-November 1997. The orange 21-period weighted true-range trail, scaled by three, sits under price through the long advance and only flips above after the November 1997 break, which is how Abraham names the uptrend. Prices and the trail were read off the TradeStation plot, not from a printed table.Chase Manhattan (daily) · Daily · 1996-10-01T00:00:00.000Z to 1997-11-14T00:00:00.000Z

Abraham’s volatility stop is a 21-bar weighted average of true range multiplied by 3, subtracted from the highest close in an advance and added to the lowest close in a decline. Digitized from a low-resolution screenshot; values are approximate to about one dollar.

Educational research material, not investment advice. Historical source context does not establish present-day performance.
6 of 36 in the ATR position sizing track
19991-7 pp.Next on ATR position sizingA trend filter that switches tactics and scales ATR targetsA 14-period Average Directional Index on end-of-day data was treated as a coarse momentum gauge, with readings near 15 to 20 called weak and readings above 30 called stronger.
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 fieldTrend and mean reversion96 readingsBy year199856 readings
All 43 readings tagged ATR position sizing
Also on ATR position sizing5 readings
1989A close-only volatility reverse bound to average true range2019Trend systems need a no-trade rule1993A shared harness for trend-filter construction2007Constructing a rule-based entry with Relative Strength Index and ATR position sizing2017A dividend date as a pairs-trading classroom