May 5, 2014

Should one trade high or low volatility stocks?

If one is trying to develop a multi-month hold stock strategy, is it better to focus on high or low volatility stocks? For a long time, I have wanted to add a longer term stock strategy to my basket of strategies that I trade. I do not expect this strategy to perform as well as my shorter term strategies but work as a complement to them

Low volatility or high volatility? Short term trading strategies tend to do best when they focus on high volatility stocks. Will this be true for a longer hold strategy?

The test

We will start with a basic test. In future posts, we will expand and refine on the rules. Date range from 1/1/2004 to 12/31/2013.

Buy Rules

  1. Stock has 21 day moving average dollar-volume greater than (10,20) million over the last 3 months
  2. Close is greater than $5
  3. Six month return is greater than 10%
  4. Close is greater than the 200 day moving average
  5. The SPX close is above the 200 day moving average
  6. The stock’s 100 day historical volatility(HV100) is between (20,30) (30,45)(45+) for the last 5 five days

Sell Rules

  1. 15% trailing stop evaluate at the close

Buy rules 1 & 2 are liquidity rules. Rules 3 &4 are a simple way to determine that the stock is an uptrend. Rule 5 is our market timing rule. Since we are trading longer term, we want the market wind at our back. Rule 6 is what we want to know. These ranges were picked to give approximately the same amount of trades in each bucket.


$10,000,000 Dollar-Volume Results


Several stats jump out. First the average % p/l is significantly better for the lower HV100 stocks. Lower volatility stocks also have a much higher % winners. The one down side is they have a much higher holding period.

$20,000,000 Dollar-Volume Results

How do these results hold for higher dollar-volume stocks?


The same pattern holds. What is surprising is the higher dollar-volume stocks in the bottom HV100 bucket have a higher avg %p/l. Not what I expected.


If you’re interested in a spreadsheet of the data used to generate these tables, enter your information below, and I will send you a link to the spreadsheet. The spreadsheet includes yearly breakdown with more variations.

Additional Notes on Testing

These tests were done using Norgate data. I am evaluating their data as a possible replacement to my current data provider, CSI Data. The reason for this is they integrate much better with AmiBroker and they have historical index constituent data.

Conclusions and Next Steps

These first tests point to trading lower volatility stocks and those with higher dollar-volume. Next steps is testing for a better exit. Some current thoughts are using an ATR stop and using profit targets.


Click Here to Leave a Comment Below

GekkoQuant - May 5, 2014 Reply


You may like my post on the same subject at

I rank stocks by their n day standard deviation and create a low vol stock index and a high vol index, my summarised results are below.

For short lookback (30days) low vol index was the best performer
For long lookback (250days) high vol index was the best performer

    Cesar Alvarez - May 5, 2014 Reply

    Interesting. I will have to try both a 30 & 252 day HV and see how that changes the results.

david - May 5, 2014 Reply


A possible issue with your test is that you’re using a % trailing stop. Naturally, high vol stocks will move through greater % ranges and would therefore be more likely to hit the trailing stop. A volatility based trailing stop or time stop (especially) would give you a truer indication of the impact of volatility.


    Cesar Alvarez - May 5, 2014 Reply

    I agree with you about the fixed percentage stop. That is why I commented in my post about trying ATR based stops next. I will add a time based stop to my next round of tests. Thank you for your suggestions.

Daily Wrap for 5/5/2014 | The Whole Street - May 5, 2014 Reply

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Matt - June 17, 2014 Reply

Did you end up using Norgate for EOD and Historical data?

    Cesar Alvarez - June 17, 2014 Reply

    Yes, I have switched over to Norgate data and I have been very happy so far. They are quick to respond to data issues and technical issues.

Amit Kumar - June 25, 2014 Reply

How did you calculate historic volatility?

    Cesar Alvarez - June 26, 2014 Reply

    Here is the formula i use in AmiBroker for 50 day HV

Low Volatility Stocks: 20%+ CAGR Portfolio » Alvarez Quant Trading - July 7, 2014 Reply

[…] on from our previous posts and research, Should one trade high or low volatility stocks? , Stops and trading high vs low volatility stocks, and Low Volatility Stocks and Profit Targets, we […]

Marco - September 29, 2014 Reply

I get the same results in overnight trading patterns… Low volatility favors bullish ones.

Marcus - July 6, 2017 Reply

If you look at the profit per bar held, isn’t the result pretty much the same for every bucket?

Or is there a better metric than profit/bar to use here?

    Cesar Alvarez - July 6, 2017 Reply

    As always it depends on the metric one uses. I used to like profit/bar but no longer really use it.

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