Volatility Filters That Work: Boost Strategy Performance of RSI2

TL;DR

• Volatility filters reduce drawdowns and smooth equity curves.

• Four filters tested: ATR, Standard Deviation, Bollinger Band Width, and StatOasis Regime Filter.

• All improved the classic RSI2 strategy’s return-to-drawdown ratio.

• No single best filter, combining them into a portfolio gives the most consistent results.

• Every serious trader should explore volatility filters for long-term edge.

Why Strategy Filters Matter More Than You Think

Most beginner traders obsess over entries, stacking indicators like RSI, MACD, and moving averages, hoping to find the perfect combination. But here’s the truth, A solid filter can turn a decent strategy into a robust performer.

“Winning traders manage risk. Losing traders chase win rate.” – Ali Casey, StatOasis

What Is a Volatility Filter in Trading?

A volatility filter is a simple condition added to your strategy to avoid entries during high-risk, erratic price environments.

While entries try to predict when to trade, filters decide if you should trade at all.

Volatility filters do one thing exceptionally well: reduce drawdowns. And that’s a huge deal because it directly improves your strategy’s return-to-drawdown ratio, a key performance metric used by hedge funds and pro quants alike. 

The Test Setup: A Clean RSI2 Strategy as the Baseline

To test volatility filters properly, we need a reliable baseline. The RSI2 classic strategy is perfect:

• Entry: RSI(2) < 25

• Exit: RSI(2) > 75 or exit after 10 bars

• Market: S&P 500, Daily bars, day session

• Fees: no slippage/commission

Why RSI2? Because it’s simple, transparent, and has been tested in dozens of videos and articles. This makes it easy to spot if a filter actually adds value. 

Filter #1: StatOasis Regime Filter – Proprietary Power

This proprietary filter, exclusive to Algo Trading Masterclass students, uses a more sophisticated regime detection model based on volatility dynamics.

What happened:

• Net Profit: $149,300

• Profit Factor: 2.5 (highest among all filters)

• Win Rate: 76.3% (highest win %)

• Exposure: 20.8% (lowest)

Despite having the lowest net profit of the four filters tested, the StatOasis filter had the best risk-adjusted performance. Its high win rate and very low exposure make it ideal for traders looking for smoother equity curves and capital efficiency. 

🧠 Related Read: Mastering Market Regimes

Volatility filters are just one way to adapt your strategy to changing market conditions. But if you want to go even deeper, check out this article on mastering market regimes {{https://statoasis.com/post/mastering-market-regimes-when-to-trade-and-when-to-stay-out}}. It breaks down how to detect when to trade, when to sit out, and how to use regime filters to improve your strategy timing. A must-read if you're serious about reducing risk and increasing consistency. 

Filter #2: ATR – The Classic Volatility Gauge

The Average True Range (ATR) measures how much a market moves, regardless of direction. It’s a staple in trading, often used to size positions or trail stops. But here, we used it as a filter on a mean reversion system.

How we used it:

• Example condition: “Only trade when ATR is below a threshold” or “ATR is falling”

What happened:

• Net Profit: $186,675

• Profit Factor: 2.3

• Win Rate: 75.8%

• Exposure: 22.5%

ATR proved to be a well-balanced filter, delivering solid net profit while cutting exposure nearly in half compared to the base strategy. It was the second-best performer in most categories.

Filter #3: Standard Deviation – Measuring Market Chaos

Standard deviation is another way to capture volatility, focusing on how spread out recent prices are from the mean. It tends to react faster to sudden shifts in price dispersion.

How we used it:

• Example condition: “Only trade when Std Dev is below X” or “Std Dev is declining”

What happened:

• Net Profit: $176,650

• Profit Factor: 1.7

• Win Rate: 74.3%

• Exposure: 32.7%

Std Dev didn’t perform as strongly as the others. While it reduced drawdown and slightly improved profit factor over the base strategy, its improvements were more modest. Still, it adds variety to a portfolio thanks to different trade behavior.

Filter #4: Bollinger Band Width – Custom But Powerful

The Bollinger Band Width filter measures the space between the upper and lower bands, reflecting how “quiet” or “explosive” the market is.

How we used it:

checked whether the band width was increasing or decreasing from the previous bar. This helped identify expanding or contracting volatility zones.

What happened:

• Net Profit: $199,125 (highest among all filters)

• Profit Factor: 2.2

• Win Rate: 75.9%

• Exposure: 21.6%

The BB Width filter delivered the highest net profit while keeping exposure low and win rate high. A fantastic option for traders who want both performance and efficiency.

Which Volatility Filter Performed Best?

We tested four volatility filters—ATR, Standard Deviation, Bollinger Band Width, and the proprietary StatOasis Volatility Regime, on top of the RSI(2) baseline strategy.

Comparison table showing RSI2 with and without volatility filters (SO Volatility, ATR, StDev, BB Width) with performance metrics like profit, drawdown, win rate, and exposure.

Takeaways:

• BB Width had the highest Net Profit, beating even the unfiltered RSI(2) version.

• StatOasis Volatility delivered the highest Profit Factor and Win %, despite lower net profit. It also had the lowest exposure, making it attractive for capital efficiency.

• ATR was the best overall balance: second-highest in Profit Factor, Net Profit, and Win %, with very low exposure.

• Standard Deviation improved performance slightly, but not as significantly as the others.

No single filter dominated across all metrics. Instead, each one offered a unique benefit. And that’s the real power: combining them can yield more stable and diverse portfolios.

What Happens When You Combine Filters into a Portfolio?

We combined all four RSI2 strategies—each using a different volatility filter—into a single portfolio. Since each filter reacts to different volatility regimes, the trades had only moderate correlation (between 0.32 and 0.61). This helped smooth out equity swings while keeping exposure efficient.

Portfolio Highlights:

• Net Profit: $646,912

• Total Trades: 934

• Time in Market: 39.37% (less than half the time)

• Max Drawdown: ~$50,000

• Profit Factor: Varies yearly, with some years reaching 5.83+

• Worst Year: 2018 (−$34,812)

• Best Year: 2024 ($150,962)

• Equity Curve: Smooth and rising, with consistent compounding and quick recovery from drawdowns

Portfolio equity curve of 4 volatility-filtered RSI2 strategies showing consistent growth and reduced drawdowns.

Portfolio performance metrics including net profit, annual returns, trade count, and correlation matrix for RSI2 strategies using different volatility filters.

The result? Lower drawdowns, better trade efficiency, and higher confidence—without increasing time in the market.

This approach proves the power of portfolio design even when using the same entry/exit logic. Filters don’t just improve individual strategies—they compound when paired smartly.

Why Volatility Filters Work So Well

1. They avoid bad trades during market shocks.

2. They reduce overtrading, improving average trade value.

3. They adapt to market regimes, especially in mean-reversion strategies.

Volatility is the market’s emotional signature. Filters let you sidestep the chaos and trade the calm.

🎥 Want to See the Full Breakdown in Action?

If you're more of a visual learner, I walk through all four filters, the RSI2 setup, and portfolio results in this video: Watch it here {{https://youtu.be/AR8rn6wDYkA}}. You'll see the logic behind each filter, equity curve comparisons, and how combining them creates a smoother, more resilient strategy. Perfect if you're building your own systems or just want to see the filters in action.

 How to Start Using Volatility Filters in Your Own Strategies

Here are 3 plug-and-play ideas:

• ATR: “Only enter if ATR(14) is below its 10-bar average”

• Std Dev: “Only enter if Std Dev(20) is falling for 3 bars”

• BB Width: “Only enter if BB Width is lower than yesterday”

Try applying these to your best strategies and compare performance. You’ll likely see immediate improvement in Ret/DD ratio.

FAQs About Volatility Filters in Trading

Q: What is the best volatility indicator to use as a filter?
A: ATR and Std Dev are great starting points. The best one depends on your strategy and market.

Q: Can I use more than one filter?
A: Yes! Combining multiple strategies with different volatility filters leads to smoother performance.

Q: Should I always use a volatility filter?
A: In most strategies, yes—especially in mean reversion setups. It helps avoid entries during chaotic markets.

Q: What’s the difference between ATR and Std Dev?
A: ATR measures range movement; Std Dev measures dispersion from the mean. Both track volatility but in different ways.

Q: Is a volatility filter enough to fix a bad strategy?
A: No—it won’t rescue a bad entry. But it can significantly improve a good one.

Q: What is StatOasis Market Regime?
A: It is a proprietry indicator that divide the market in several regimes based on direction and volatility. They are not optimizable and they only available for Algo Trading Masterclass students.

Conclusion: Don’t Skip the Most Powerful Filter You’re NOT Using

Volatility filters are like a bouncer at the door of your strategy. They don’t let trouble in.

They reduce drawdown, boost consistency, and help you survive market storms. And when used correctly, they don’t limit profits—they unlock better ones.