Transcript Average True Range (ATR)

leadingtrader.com
Strategies For Reducing Risk
with Alessio Rastani
The Science of Using A Stop-Loss
This presentation is neither a solicitation
nor an offer to Buy/Sell stocks, futures or options.
No representation is being made that any
account will or is likely to achieve profits or losses
similar to those discussed on this webinar.
The past performance of any trading system
or methodology is not necessarily
indicative of future results.
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Strategies For Reducing Risk
with Alessio Rastani
The Science of Using A Stop-Loss
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The Agenda
1) Understanding a stop-loss order
2) My top 3 techniques for placing a stop:
(i) simple
(ii) advanced
1) A key indicator to watch before you place a
trade
2) Ideal places to place a stop
3) Where You should never place your stop
4) Best and Worst Times To Trade
“You Can Never Go Broke Taking A
Profit…” ~ Wall Street Saying
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How Most People Trade
BUY
Price
SELL
Use Stop Loss Orders
To Control Risk
Sell order
Sell order
Limited loss
Sell order
Buy 2
1
Sell order
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Unlimited
Profit
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You can be wrong and
still make money
How Most People Trade (wrong way)
• Win 9 times, and lose once
• Win $100 x 9 = $900
• Lose $1000
• Net: - $100
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You can be wrong and
still make money
How Professionals Trade (the right way)
• Lose 5 x and win 5 x
• Lose $100 5 times.
• Lost: $100 x 5 = $500
• Win $300 x 5 = $1500
• Net = $1000
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What is a Stop-Loss?
1) An order placed with a broker to exit the market
(either to sell if you originally bought, or to buy
back if you originally went short).
2) It is designed to LIMIT your LOSS and exposure
to RISK.
3) It is not a choice. It is a MUST if you wish to
protect your capital.
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"Rule No.1 is never
lose money. Rule No.2 is never
forget rule number one.” Warren Buffett
PROTECT YOUR CAPITAL!
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Where Do You Place Your Stop-loss?
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Where Do You Place Your Stop-Loss?
It Depends on at least 3 factors:
• Your Strategy
• Volatility of the market
• What You See On The Chart:
(i) Support/Resistance
(ii) Price Structure
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IMPORTANT:
Your stop-loss should be placed based on
the LOGICAL dynamics of the market!
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Where Do You Place Your Stop-Loss?
It does NOT depend on:
(1) How much money you are prepared to
lose or risk on a trade…
(this is usually misunderstood)
(2) Some arbitrary figure or percentage
away from the entry price.
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Wide Stops or Tight Stops?
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Very Tight Stops:
too close to price
(NOT RECOMMENDED)
entry
Stop-loss
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Very Wide Stops:
unnecessarily too far from the entry
price
(NOT RECOMMENDED)
Stop-loss
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Wide Stop: A safe distance away
from the price
entry
Stop-loss
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Tip No.1 : Use wider stops and give it
plenty of “wiggle room”
(higher odds of success)
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Tip No. 2: Reduce your position size (e.g.
trade FEWER contracts/shares or £/per
point) when using wide stops
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Logical Techniques For Placing A
Stop-Loss
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A Useful Rule To Remember:
Ask Yourself: “Where does the price have
to move to, to prove that I am wrong?”
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BAD NEWS:
The more “smart” you think you are, the
more money you will lose…
(“smart” people don’t like to be wrong)
GOOD NEWS:
The more honest you are to yourself, the
better a trader you will be…
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Logical Techniques For Placing A
Stop-Loss
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Strategy No.1:
Price Structure: Support & Resistance
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Price Structure: Support & Resistance
Most common and basic place for stoploss:
• Previous highs and lows
• Beneath support or above resistance
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Buy Entry at Breakout
(from resistance)
Stop-loss at recent previous lows
(support)
Stop-loss at recent previous highs
(resistance)
Short Entry at Breakout
(from support)
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EURUSD – 5 min
Flag Example
Buy Entry at Breakout
(from resistance)
Stop-loss beneath recent
Lows (support)
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Flag Example
Buy Entry at Breakout
(from resistance)
Stop-loss beneath recent
Lows (support)
Strategy No.2:
Volatility-based stops
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Plot “Average True Range” Indicator on your chart
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Free Charts: getETX.com
Average True Range
(ATR)
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Free Charts: getETX.com
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Average True Range (ATR)
(setting 14)
Is a measure of volatility in the market
Is an average of the range (difference
between highs and lows of each bar) of
the price bars for every 14 periods.
High Volatility = High ATR readings
Low Volatility = Low ATR readings
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Dow Jones 30 - Daily
Average True Range
is 130 Dow points
Average True Range
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Dow Jones 30 – 1hr
Average True Range
is 32 Dow points
Average True Range
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Dow Jones 30 – 5 min
What is ATR?
Average True Range
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Average True Range (ATR)
(setting 14)
Rule For Stop-Loss Placement: 2 x ATR
For example:
if ATR is equal to 10 points (or 10
pips/cents) then use a stop-loss 20 points
(or 20 pips/cents) away from your entry.
Why? Because (ATR x 2) = (10 x 2) = 20
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Dow Jones 30 – 5 min chart
What is the stop-loss
size based on ATR?
Average True Range
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Dow Jones 30 – 5 min chart
ATR x 2 means
13 x 2 = 26 point stop-loss
Average True Range
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S&P mini-futures – 5min
Squeeze setup:
Bollinger bands (20, 2), Keltner Channels (20,1.5)
MACD momentum (8, 21 histogram)
(video is on: LeadingTrader.com/squeeze
Average True Range (ATR)
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S&P mini-futures – 5min
Entry when the squeeze fires!
But where is your stop-loss?
Average True Range (ATR)
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S&P mini-futures – 5min
For stops – you can use either:
PRICE STRUCTURE (previous highs/lows)
OR use 2 X ATR
2 x ATR = 2 x 1.0 = 2 pt.
stop distance
2 x ATR = 2 x 1.6 = 3.2 pt stop distance
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EURUSD – 4hr
Short Squeeze fires!
Where is your stop?
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EURUSD – 4hr
Based on Price Structure
(previous highs = 1.3350)
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EURUSD – 4hr
Based on Volatility:
ATR x 2 =
38 x 2 = 76 pips away from entry price
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Risk Free trade: Once in profit, Don’t forget to
move your stop to breakeven!
TIP – WRITE THIS DOWN!
You can also trail your stop based on 2 X ATR
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You can trail your stop based on 2 X ATR
As the market moves in your favour,
Trail your stop based on 2 x ATR
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Keltner Pullack Setup (K.P.)
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Keltner Pullback Setup (K.P.)
Also Volatility Based – but easier than ATR.
Use Keltner Channels (volatility based
envelope indicator) - settings:
(21 period, 2.0 ATR multiplier, 14 ATR) – Daily charts
(21 period, 2.5 ATR multiplier, 14 ATR) – Intraday Charts
PLUS: MACD setting (20,43,3)
(NOTE: On getETX.com charts, instead of MACD you can
use the “Awesome Oscillator” setting: 21,89)
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getETX.com
Keltner Channel
settings:
(21, 2.0) for Daily charts or
(21, 2.5) for intraday
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Daily Chart settings
As the market moves in your favour,
Trail your stop based on 2 x ATR
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Intraday Chart settings
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EURUSD – Daily Chart
As the market moves in your favour,
Trail your stop based on 2 x ATR
Awesome oscillator (21,89) on getETX.com
is used as a directional filter
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EURUSD – Daily Chart
Sell Short Example:
Entry at pullback to the Mid-band (21
EMA) (blue arrow)
Stop-loss at UPPER Band (red arrow)
First profit target at LOWER Band
(magenta arrow)
As the market moves in your favour,
Trail your stop based on 2 x ATR
Awesome oscillator (21,89) on getETX.com
is used as a directional filter
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LONG (Buy) Example:
Entry at pullback to the Mid-band (21 EMA)
Stop-loss at LOWER Band
First profit target at UPPER Band
LONG (Buy) Example:
Entry at pullback to the Mid-band (21 EMA)
Stop-loss at LOWER Band
First profit target at UPPER Band
As the market moves in your favour,
Trail your stop based on 2 x ATR
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Sell Short Example:
Entry
at pullback
to in
theyour
Mid-band
(21 EMA)
As the
market
moves
favour,
Stop-loss
UPPER
Band
Trail your stop
basedaton
2 x ATR
First profit target at LOWER Band
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Where you should never place your stop
Too close to entry price
Ignoring the volatility (ATR) of the market
Close to an obvious point of support and
resistance (place the stop slightly beyond this
area)
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Best and Worst Times To Trade
Best Times:
Tuesday – Thursday 10am ET – 11:30am ET and
then at 3pm ET – 4pm ET (last hour)
Worst Times:
Too close to news announcements
Lunchtime Doldrums 11:30am – 2pm ET
Typically the first half hour of market open
Choppy Markets
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Recommended Charts & Trading Platform:
All Countries (except USA):
getETX.com (FREE)
USA:
Tradestation - contact: Tony Ortiz
LeadingTrader.com/charting
France, Germany or Italy (FREE):
LeadingTrader.com/charting
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THANK YOU very much
for attending this webinar!
Next FREE Webinar:
2-Day Live Trading Webinar
with Alessio Rastani and Kevin Burton
Thursday 3rd May and Friday 4th May