The gap between weekly and daily volatility estimates

[Fairman]

The gap between weekly and daily volatility estimates

Volatility estimates use different horizons. A weekly average range may suggest 60 pips a day. A daily estimate from the last few days may say 40. A scalper working on an hourly range sees something else again.

Using the wrong horizon leads to wrong expectations. Targets sized from weekly data are too ambitious for a quiet day. Stops sized from the last hour are too tight when volatility returns.

A common technique is to compare the current session's range with the recent average at the same time of day. A session running at half the typical range by midday is unlikely to make up the difference.

Adjusting target sizes to the day's realised volatility improves the hit rate.

A middle path is the average range for the same hour of the day over the last twenty sessions. It respects the daily rhythm and adapts quickly. A target sized as a fraction of that hourly figure, say a quarter of it, tends to track conditions better than any fixed pip number.

How does the target size compare with the realised range on the day, and is it adjusted?