HOW-TO use Volatility-Based Average Stop Loss

Sep 13, 2023

Volatility-Based Average Stop Loss (VBASL) is a trading strategy that sets stop loss levels based on market volatility to help traders maintain stable profits in their trades.

The benefit of this stop loss strategy is that it can adjust the stop loss level according to market volatility. When the market volatility is high, the stop loss level will be adjusted more loosely to avoid being triggered by short-term market fluctuations. Conversely, when the market volatility is low, the stop loss level will be adjusted more tightly to protect traders' profits.

The purpose of this strategy is to maintain stable profits in trading. By adjusting the stop loss level based on market volatility, traders can better control risks and avoid exiting trades too early during large market fluctuations or holding positions excessively during small market fluctuations. This way, traders can better capture market trends and gain more profits when trends continue.

Therefore, VBASL strategy helps traders maintain stable profits in their trades by adjusting the stop loss level based on market volatility. This strategy can assist traders in better risk management and gaining more profits when there are continuous trends in the market. To find out VBASL price, you first need to calculate Average True Range (ATR), which measures market volatility. Then multiply ATR by a factor chosen by you to determine the position of your stop-loss level.

Formula for VBASL:

`VBASL = Close - (ATR * Factor)`

Where:

- `Close`: Current closing price.
- `ATR`: Average True Range of prices.
- `Factor`: The factor chosen by you for adjusting the stop-loss level.

VBASL indicator helps set appropriate levels for your stops depending on how well or poorly markets perform. When markets are highly volatile, your stops should be larger so as not to get stopped out due to bigger price swings; conversely, when markets are less volatile, tighter stops would suffice.

By using VBASL indicator, you can avoid excessive losses while considering market conditions flexibly. Just remember that VBASL is just a tool and should be used in conjunction with other technical analysis techniques and risk management strategies.

However, how to use the VBASL indicator specifically may depend on your trading platform or personal preferences! This quantitative strategy is not universally applicable; its performance may vary greatly for different trading pairs and timeframes. Therefore, it requires manual discernment to determine which patterns are suitable for you. I have published this strategy framework on the TradingView community under the name: [blackcat] L3 Volatility-Based Average Stop Loss Strategy, which can be found and loaded from the public indicators library of TradingView.

The L3 Volatility-Based Average Stop Loss Strategy I have shared uses trailing stop loss indicators and volatility-based stops to determine entry and exit points.

The strategy parameters are as follows:

- ATR Length: The length used to calculate Average True Range (ATR) indicator for measuring volatility.
- ATR Multiplier: Applied to ATR to calculate trailing stop loss levels.
- Stop Loss Multiplier: Applied to ATR to calculate stop loss levels.

The strategy calculates ATR using the specified length. Then, it calculates trailing stop loss levels by subtracting or adding ATR multiplied by the ATR multiplier from high or low points respectively.

Stop loss levels are calculated by subtracting or adding ATR multiplied by the stop-loss multiplier from closing prices.

The entry conditions of the strategy are as follows:

- Enter Long Position: When closing price crosses above bullish level of trailing stop loss.
- Enter Short Position: When closing price crosses below bearish level of trailing stop loss.

The exit conditions of the strategy are as follows:

- Exit Long Position: When low price crosses below bullish position's stop-loss level.
- Exit Short Position: When high price crosses above bearish position's stop-loss level.

The strategy executes entry and exit orders accordingly. When the enterLong condition is true, it enters a long position and exits when the exitLong condition is true. Similarly, when the enterShort condition is true, it enters a short position and exits when the exitShort condition is true.