Deviation Stop

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,

 

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, the odds of being stopped out is statistically represented by three levels:

  • The first level can be used early on in a trade and when exit signals trigger
  • The second level is used as an intermediate stop during possible trend reversals
  • The level will usually hold for the life of the trend, but can sometimes be taken out during the first or second retracements.

Short term traders may want to use levels 2 and 3 for scaling out of a position. For example, 1/3 can be taken 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:

The Chandelier Stop changes from up to down trend as soon as the long stop 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.

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: 

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, a two bar ATR is used, i.e. the two bar high, two bar low and the close 2 bars ago. The following can then be calculated:

  • Warning Line = Highest High – TBATR
  • Stop 1 = Highest High – TBATR -1.0 * StdDev (TBATR)
  • Stop 2 = Highest High – TBATR -2.2 * StdDev (TBATR)
  • Stop 3 = Highest High – TBATR -3.6 * StdDev (TBATR)

Trailing Stop: 

The stop reflects the current volatility and accordingly, stop levels can widen in times of increasing volatility. This function can be turned off 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

The Deviation Stop is available for NinjaTrader 8 and an Indicator Spotlight on Trailing Stops discussed the ATR Trailing Stop specifically