Realized volatility from ticks beats ATR for sizing scalps

[Fairman]

Realized volatility from ticks beats ATR for sizing scalps

ATR calculated from one-minute bars is a staple for sizing stops and targets. It has drawbacks: it uses only high, low, and close, so it misses the path inside the bar, and it responds slowly to rapid changes in volatility.

Realized volatility computed from tick or second-level returns uses far more information. It reacts quickly when activity picks up and can be measured over short windows, say the last 60 seconds. That fits the time frame of scalping better.

A practical method: sample mid prices every second, compute log returns, and take the standard deviation over a rolling window. Scale it to the holding period to estimate the typical movement during a trade.

Using that estimate, stops and targets adjust automatically. In quiet moments, they tighten. In active moments, they widen, keeping the probability of being stopped by noise roughly constant.

Be wary of microstructure noise at very high sampling rates, where bid-ask bounce inflates measured volatility. A sampling interval of 1 to 5 seconds usually balances detail and noise.

Which volatility measure does the system use to size its stops, and how often does it update?