Deviation Stop

The Deviation Stop, also called the Kase Dev Stop, was originally developed by Cynthia Kase. It is designed to adapt to common market behaviors across all markets and timeframes, and approximates the statistical odds of being stopped in certain reversal scenarios. For more information, please refer to Stocks & Commodities V. 11:10 (432-436): Redefining Volatility And Position Risk by C.A. Kase,

 

Deviation Stop

Indicator Description

The Deviation Stop is suitable for trending as well as for ranging market. The stop is determined by volatility, accounting for variance and skew. Specifically, you may statistically establish the odds of being stopped out as follow:

  • One may use the first level early on in a trade and when exit signals trigger
  • You can use the second level as an intermediate stop during possible trend reversals
  • Us the third level for the life of the trend although it may be taken out during the first or second retracement

Short term traders may want to use levels 2 and 3 for scaling out of a position. For example, you may take 1/3 off at level 2 and the remaining 2/3 at level 3.

Overall, the concept is similar to the Chandelier Stop, but with a few significant differences:

Trend direction for the Deviation Stop:

You may see the Chandelier Stop change from up- to down-trend once the stop line is hit. This is not the case with the Deviation Stop. It uses as Moving Average cross to determine the trend, which does not influence the stop, but allows for determining the beginning and end of up/down trends.

If the fast MA is moving above the slow MA, the algorithm will assume a long position and and trails the stop from the highest high starting at the moving average cross. Conversely, if the fast moves below the slow, the Deviation Stops will trail from the lowest low.

A selection of Moving Averages for trend definition have been added to this version.

Deviation Stop Levels:

The Deviation Stop comes with 3 stop levels and a warning line for use in different market scenarios. Conversely, the Chandelier Stop calculates the Long stop as follows:

  • Multiple of the ATR Standard Deviation subtracted from the highest high in the current uptrend
  • Multiple of the ATR Standard Deviation subtracted from the highest high of the last N bars (Donchian Anchor)

Anchor Point:

The Deviation Stop does not apply and Anchor, it takes either:

  • the highest high in the current uptrend
  • highest Close, Typical or Median in the current Uptrend

Volatility Offset: Whereas the ChandelierStop uses the ATR, the Deviation Stop calculates the Standard Deviation from the ATR (as opposed to the standard deviation from price). In addition, you may use a two bar ATR, i.e. the two bar high, two bar low and the close 2 bars ago. You may then calculate the following:

  • Warning Line = Highest High – TBATR
  • First Stop = Highest High – TBATR -1.0 * StdDev (TBATR)
  • Second Stop = Highest High – TBATR -2.2 * StdDev (TBATR)
  • Third Stop = Highest High – TBATR -3.6 * StdDev (TBATR)

The stop reflects the current volatility and accordingly, stop levels can widen in times of increasing volatility. You may turn off this function by activating the Trailing Stop option. The Stop will then only move in the direction of the trend.

Other Library Indicators

Other than the Deviation Stop the following indicators are available from the trailing stop loss category: ATR Trailing Stop, Chande Kroll Stop, Chandelier Stop, HiLo Activator, SuperTrend M11, SuperTrend U11 and the Wilders Volatility Stop which was discussed here.

The Deviation Stop is available for NinjaTrader 8 and an Indicator Spotlight on Trailing Stops discussed the ATR Trailing Stop specifically. The Indicator Spotlight also discussed the Wilder Volatility Stop and the Chande Kroll Stop.