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The Volatility Channel SAR Robot is impressive in its simplicity. The concept is straightforward: draw a line at the highest high of the past N number of bars and the lowest low of the same. Such lines provide the channel, and the Channel Breakout strategy simply seeks to trade breakouts in either direction.
The Channel Stop is very adaptive to current market conditions since it changes with trendiness and with volatility. The Channel Stop is further away from the market in times of higher volatility and higher trendiness and closer to the market in times of lower volatility and lower trendiness. This stop is also based on strong logic: we already know that a breakout of a significant highest high or lowest low will often signal an important trend reversal.
The advantage of using a stop determined by Average True Range is that it is highly adaptive to current market conditions. The distance from our entry point to the stop would increase in periods of high market volatility, and decrease in periods of lower volatility. In actual practice we have found that most problems with the ATR stop tend to arise when the short term average true range becomes unusually small and our tight stops cause us to be whipsawed.
To avoid these dreaded whipsaws we calculate both a short term ATR (3 or 4 days) and a longer term ATR (15 or 20 days) and we always set our stops using whichever of the two ATRs is the largest. This allows the stops to move away quickly but prevents them from moving in too close after a few unusually quiet days.
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