I believe that stops, profit targets, and position sizing should be adjusted for volatility. This is a common practice among many traders to help manage their risk. I also prefer to use renko or range bar charts when trading. These charts are great because every bar is the same size and it helps weed out low volatility behavior. Unfortunately, the strength of renko and range bars is also their biggest weakness. The big down side with renko and range bars is that you cannot use average true range to determine volatility because all the bars are the same size, so the charts are already adjusted for volatility. This makes it difficult to size stops.
Would it be practical to use a fixed size stop when using range bar charts? It does not seem so. The price action still has some volatility in its movement, its just volatility that can't be measured by individual bars. You have to account for the behavior of groups of bars and not just single bars.
So how do we go about measuring the volatility of range bar charts? Perhaps using something like Bollinger bands that utilize standard deviation to calculate a measure of volatility is the answer. Maybe calculating the difference between the 10 bar high and the 10 bar low is the answer. Maybe using the three bar low or high to set stops is the answer. The thing that was great about average true range is that it was a very elegant and simple solution to the volatility issue. I would prefer to find a method that is similar in its practicality.
Any suggestions?
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