Volatility Stop

The volatility stop is another excellent method for stretching out your winning trades. If you are having a difficulty keeping your hands off trades and keep exiting too soon, this trailing stop method might be for you.

This trailing stop is based on the previously discussed Average True Range (ATR) indicator. It does a very nice job giving a trade space to move, and quickly adjusts to wide bar movement to lock in profits.

Like moving averages, you'll have to decide if you want to exit trades when price just moves below the volatility stop or require the bar to close below the stop.

In this chart below the exit comes with a close below the indicator.

volatility stop on chart of Medtronic

In this second example below, if a close below the stop was required, the trade would've lasted until the end of the session. Notice how the stop very quickly adjusts with the volatility of the triangle breakout.

Also notice how it just slightly adjusts upward as price movement calms down, giving the trade a chance to make another move up.

In this particular case, LUV didn't make a big second thrust, but the stop did its job to keep the trade alive and not let it get stopped out too soon.

Breakout trade out of triangle pattern

What I'd like you to observe on this next chart, are the two large gaps in the volatility stop. They are caused by the two wide range bars indicated by the arrows.

You really couldn't of had a better exit if you happened to be this stock on the way up, unless you had a trendline drawn from the last two retracement points.

volatility stop loss indicator

Again, don't agonize over which type of trailing stop or exit is best to use. Each one is going to work well at times and each one is going to disappoint you at other times.

Consider using different trailing stop and exit strategies on different trades.

Mix it up a bit. You might just find that your equity curve will be a little smoother that way.