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Best Method to Compare Stop Sizes Between Different Instruments
I am trying to find the best method to compare the stop sizes I am using across different instruments.
What I am thinking right now is to compare the size of the stop I am using to the instrument price, but also factor in ATR.
For example, if I have a system that trades the ES and uses a stop of 5 ticks I could divide that by the current price to get that ratio. I could also divide current ATR by the price to get that ratio. This would give me an estimation of volatility.
I'm not the best with math, but my idea is to get those stats into a single number by dividing Stop/Price by ATR/Price.
I could then apply that ratio to another security to figure out a baseline stop to use for the same strategy.
Does that make sense to anyone?
Can you help answer these questions from other members on NexusFi?
IMO back testing is studying causes for effect. Here are a few things to consider as you search for cause and effect.
Causes:
A change in ATR may indicate volatility.
A change in Price may indicate volatility.
A change in Volume may indicate volatility.
Effects:
A change in your stop is likely an effect of volatility, not the cause of volatility.
Suggestions:
1) Your calculation may be mixing cause and effect.
2) You may find the stop needs to vary with ATR/Price.
3) You may want to include volume as a cause.
I had a feeling I was missing something basic there. I think it is probably best just to use various derivatives of ATR for comparing the volatility of different instruments.
I am trying to develop a system that dynamically adjusts targets and stops based on volatility.
What methods do others use to compare the volatility of different instruments?
What about ways to measure the tendency to form trends vs aimlessly chopping around?
One thing I have been considering is to measure ATR at a much lower level by taking the cumulative 1m, 1period ATR readings of each day. I guess you could go down to the tick if you want to be more extreme, but 1m is short enough for me I think.
You could compare the daily, 1 period ATR with the "total" daily ATR that's based on the sum of all the 1m periods of the day. This should tell you how many zig zags it took intraday to get your total movement for the day. So, this would differentiate instruments that had similar ATR over longer periods, but with one being more choppy on the micro level.