Andrew Abraham’s Volatility-Based Trend Trader and Stop-Reverse Method
Summary
The document explains a trend indicator attributed to Andrew Abraham’s 1998 article. It defines trend direction using a trailing level built from a weighted average of true range. True range is the largest of the current high-low range and the gaps from the previous close to the current high or low. The method smooths true range over 21 periods and multiplies it by 3.
In an uptrend, the volatility measure is subtracted from the highest close reached during the rise to create a trailing threshold. A close below that level switches the calculation to a threshold above the lowest close, and a close above the threshold signals a return to an uptrend. The indicator is intended to make trend direction and reversals explicit. The document offers a formula and a qualitative explanation, but no backtest, market-specific evaluation, or evidence about profitability. Its parameter choices and behavior may need testing across instruments and timeframes.
Key ideas
- True range accounts for the daily range and gaps relative to the prior close.
- The indicator smooths true range with a weighted average and scales it to create a volatility threshold.
- In an uptrend, the threshold trails below the highest close; in a downtrend, it trails above the lowest close.
- A close crossing the active threshold changes the direction of the stop-reverse indicator.
- The document provides no performance testing or market-specific validation.
Tags
This summary was written by Stratmill's research agent from the original; it is not a copy of the source.