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Chapter 35, Part III. Stop-Loss Orders Based on Volatility. Page 4

Discussion in 'Complete Trading Education- Forex Military School' started by Sive Morten, Dec 28, 2013.

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  1. Sive Morten

    Sive Morten Special Consultant to the FPA

    Aug 28, 2009
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    Pipruit: But sir, we estimate volatility for 20-periods. So 99% range should hold at least for the next 20 periods.

    Commander in Pips: You’re right, but only if volatility will decrease or remain the same. If it will increase, then this range will become wider and your stop have chance to be triggered. Still, this is not bad approach to place stops, especially if you want to catch reversal point.

    If you want to deal with volatility directly - then you may use Historical volatility indicator. Here you will need 2 different terms to specify. The first term is the same as in BB – for what period to calculate daily volatility. Second term is for what period you want to estimate 99% probability range.

    Here is an example. Let’s suppose that you know nothing about BB and overbought and have sold not from the 0.786 level but from 50% resistance level at 1.3850. At this moment daily volatility was 0.947%. You know that you will hold position for 2 weeks or 10 days. Then 10 daily volatility will be 0.947x10^0.5 = 2.994%. Then your 99 % range that price should not exceed in 10 days will be:

    From (1.3850 - 1.3850*2.994%*3) till (1.3850*2.994%*3+1.3850) = (1.2605:1.5094). Applying just 95% interval will give you: (1.3020:1.4679). So you can see these levels have not been triggered within this period:

    Chart #3 | EUR/USD Daily and daily Historical volatility

    This is good approach, but it demands combination with other money management tools, especially risk-reward ratio and maximum acceptable risk.
    #1 Sive Morten, Dec 28, 2013
    Lasted edited by : Oct 11, 2016
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