The Wilder Volatility Stop

Volatility Stop for NT8

In this Indicator Spotlight, we’re looking at the Wilder Volatility Stop which was introduced by Welles Wilder in his book, “New Concepts in Technical Trading Systems”. To learn more about the general idea behind Wilder’s Volatility Stop indicator and additional options that come with our version, watch the video or continue reading below:

As with the majority of other trailing stops, it relies on an anchor point which serves as a reference price. Specifically, it adds or subtracts a multiple of the Average True Range (ATR) to the “significant close” in order to calculate the stop.

The Significant Close

A long stop is calculated by subtracting a multiple of the ATR from the “significant close” in the lookback period. Wilder refers to the significant close as “…the extreme favorable close price reached while in a trade.” During a bullish move, this means that the “significant close” is determined as the highest close since the beginning of the trend.

Furthermore, when used with time based bars, Wilder’s Volatility Stop indicator adjusts to the current market environment. Specifically, it allows for stop widening when volatility increases and tightening when it decreases. This generally makes sense because there’s often a decrease in volatility following a strong price move. However, during consolidation periods (low volatility), the stop will tighten and often prematurely trigger a trend change.

Volatility Stop for NT8

In the event that a widening of the stop is not desired, you have the option of Wilder’s Volatility Stop indicator comes with an option of activating the traditional trailing stop feature. When selected, a stop widening is not permitted and the stop will only move in the direction of the position.

Wilder Volatility Stop for NinjaTrader 8

Conversely, the short stop is calculated by adding a multiple of the ATR to the “significant close”. In a downtrend the “significant close” is determined as the lowest close since the start of the trend. Again, when used with time based bars, Wilder’s Volatility Stop indicator adjusts to the current market environment, allowing for stop widening when volatility increases and tightening when it decreases.

Stop widening when volatility increase

The Donchian Anchor

The volatility stop indicator also comes with the option of replacing the “significant close” with a Donchian Anchor. The “Significant Close” then refers to the extreme favorable close within the lookback period, as opposed to the trend start. For a long stop, a multiple of the ATR is then subtracted from the highest close in the lookback period. By default the indicator applies a ATR multiple of 3 for a 7 bar lookback period.

Donchian Anchor Stop for NT8

For a short scenario it adds a 3 multiple of the ATR to the lowest close in the the 7 bar lookback period. As you will see in the below scenario, it continually accommodated the stop countertrend wise, incurring significant losses.

Donchian Anchor Stop for NinjaTrader 8

Therefore, you should only use the Donchian Anchor with the trailing stop option activated (widening not allowed).

Donchian Anchor Trailing Stop

Testing the Volatility Stop Indicator

We have done some preliminary testing of  the following  4 options for the volatility stop indicator:

  • Widening stop – based on the significant close since the trend start
  • Trailing stop – based on the significant close since the trend start
  • Widening stop – based on the significant close in the lookback priod
  • Trailing stop – based on the significant close in the lookback priod

(A) The volatility stop indicator does not work well in short timeframes (<60 min.). This is due to the fact that prices deviate significantly from the normal distribution in shorter timeframes, i.e. extreme movements occur frequently. They simply trigger too frequently, resulting in significant losses.

 (B) For short timeframes you therefore have to use larger multipliers than in higher timeframes, i.e. a 3.5 to 4.0 multiple of the ATR. Still, you should not be expect a positive outcome. The multiplier proposed by Welles Wilder is meant for use in higher timeframes than 60 minutes, or on daily charts.

 (C) For the Wilder Volatility Stop, the stop widening option is preferable allowing for stop adjustments during periods of increasing volatility.

 (D) With the Donchian Anchor, it is the other way around. Because it is determined by the most favorable close in the lookback period, one should always use it with the trailing stop option activated.

To download the volatility stop indicator for NinjaTrader 8, please follow the below link:

Other than the Wilders Volatility Stop the following indicators are available from the trailing stop loss category: ATR Trailing Stop, Chande Kroll Stop, Chandelier Stop, Deviation Stop, HiLo Activator, SuperTrend M11 and the SuperTrend U11. For specific trading setups where the volatility stop may be used, you may have a look at our Indicator Spotlight issues on the Squeeze and the Donchian Channel.