by Peter Aan
Rules: The volatility system uses a close-only reversing stop that is activated only on the close and
trails behind the most favorable close attained in the trade. Volatility determines how closely the stop will
trail the market. During volatile periods, the stop may lag considerably behind the market, and during
quiet periods the stop will remain closer to recent market action.
To follow the system, you must first measure the volatility. Wilder expresses volatility as the average true
daily range over the last "n" days. True range refers to the actual range (high-low) plus the gap, if any,
between yesterday's close and today's high or low. The ranges for the last "n" days are added together and
divided by "n" to compute the volatility for the first day. For successive days, Wilder uses a shortcut
method for smoothing the data. For example, if you are using a 10-day computation for determining the
volatility, take yesterday's average true range, multiply by nine and add today's true range and divide by
10. The shortcut produces a psuedo moving average that is easier to calculate without a computer and
approximates a 10-day simple moving average.