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Using ATR to calculate stop location


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Hi all,

Do you think this is a reasonable approach to setting a stop loss? I've read in various places including van k tharpe's book the idea of using multiples of ATR to set a stop loss whatever your time frame is. The issue for me is that 2-3x the ATR of a time period seems like a massive stop but perhaps to others its entirely reasonable? I tend to have my stop at the low but of course this is an obvious location that could be at risk.

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19 hours ago, u0362565 said:

Hi all,

Do you think this is a reasonable approach to setting a stop loss? I've read in various places including van k tharpe's book the idea of using multiples of ATR to set a stop loss whatever your time frame is. The issue for me is that 2-3x the ATR of a time period seems like a massive stop but perhaps to others its entirely reasonable? I tend to have my stop at the low but of course this is an obvious location that could be at risk.

YES - If it works for the trade then yes and for trailing too

Best thing you can do is look at your proposed trading method - calculate its win ratio expectancy etc and also visually SEE what price bars do when it works

When traders don't know what exactly their method does/doesn't do - they have wide stops, which eats profits

It all depends on the trading method - for example if you're catching reversal points/turns in the market then if you're right the market will NOT trade past the swing low/high point, so that's where your stop would go at worst case

Trading the reversals in an uptrend - WHAT WILL THE MARKET NOT DO IF YOU'RE RIGHT?

It won't trade BELOW the majority of swing low points

So for that strategy placing a stop any lower than the prev swing low just doesn't make sense - so a stop using ATR multiples might not be that good/clever on that type of strategy - but buying breakouts using a ATR multiple might be

493.thumb.JPG.7266ba3f0214c3636262759253b14b0c.JPG

This is trailing 20 period ATR of a factor of 2 (multiple of 2)

494.thumb.JPG.c5f907ec1f42d3488dda2c385c55bf60.JPG

So you need to decide on the trading METHOD, work out what it DOES and then BUILD - Entry, Stop, Trailing etc to the method when it works

As you can see in the example above if you wanted to catch the big trends then you'd need to use a bigger multiple/factor of the 20 period ATR or you could just BUY when price moved up through the ATR line

Good luck

 

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Thanks for the replies guys.  I brought this up because i try to use tight stops, but due to inaccuracies in finding the turn point i need several attempts to get into a position.  Sometimes the running loss can be 1x + ATR so i kind of wonder if the tight stops really make sense.  If i'm not estimating the turn well then maybe i should just give it more room and use the multiple ATR approach.  The problem i have with this is that i hate seeing the market go against me and with an ATR multiple obviously you're giving it room to move against your entry point by quite a lot, but in theory if it doesn't get to the stop you don't realise a loss whereas with tight stops i certainly do at least temporarily until the market moves sufficiently in my favour.

Another comment on using ATR, you never move the stop down right? only up so if the ATR increases, you just ignore that until it reduces again and which point you start trailing the stop up/down again?

 

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2 minutes ago, u0362565 said:

Thanks for the replies guys.  I brought this up because i try to use tight stops, but due to inaccuracies in finding the turn point i need several attempts to get into a position.  Sometimes the running loss can be 1x + ATR so i kind of wonder if the tight stops really make sense.  If i'm not estimating the turn well then maybe i should just give it more room and use the multiple ATR approach.  The problem i have with this is that i hate seeing the market go against me and with an ATR multiple obviously you're giving it room to move against your entry point by quite a lot, but in theory if it doesn't get to the stop you don't realise a loss whereas with tight stops i certainly do at least temporarily until the market moves sufficiently in my favour.

Another comment on using ATR, you never move the stop down right? only up so if the ATR increases, you just ignore that until it reduces again and which point you start trailing the stop up/down again?

 

That's the decision you have to make as to how you trade - if you are catching the turn you can use a very tight stop - I know this for a fact as its exactly what I've done for the past 10+ years

If however you aren't very good at timing the turns then you will get stopped out often and maybe a wider stop suits you better - there is nothing wrong with taking 3 attempts to get in on a move if the move returns excellent R return - I'd quite happily take 3-5 attempts if the R value returned 10+R - you will know whether this is possible through the expectancy of your system/method etc

If you take 3 attempts to make 1-3R return then taking multiple attempts is not wise - maybe trading the breakout rather than the turn may suit best?

Again it comes down to the trading method - whether it works effectively or not

I've proved in my "How to Win" thread that you can catch the turning points of the market with a tight stop of 1 bars range and within 1-2 bars of the swing point

Re trailing stop loss - it is NEVER moved downwards, only upwards or kept flat if market action dictates (for long positions)

Another technique would be to using the trailing stop ATR calc on a higher time-frame i.e. trade on the daily chart and use the weekly for the trailing stop etc - but this is just the same as employing a wider ATR calc on the daily chart!

There is NO perfect system here for trailing stops

I think we all feel that - again its something you have to build into your system - you either take a profit at xR and hope it stops and reverses thereafter or give it room to move at the expense of giving back a chunk

Leaving room for the trade to operate becomes much much easier when you realise no-one in the world can predict exact price levels (believe me I've spent years researching and testing) - one time you'll set a target and it'll work perfectly, the next time you'll do the same and miss out on multiple profits - just got to find a balance that works for you

 

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Thanks THT, yes well i do estimate my possible returns by estimating a target price.  Of course if the market doesn't get there then i've got several smaller rolling losses to deal with and i've not figured out yet how i make up for that if it turns out i'm wrong.  I'm currently not using a trailing stop for simplicity and the sake of not adding another variable into the mix.  However, I imagine that only having a binary situation where the market either hits the stop or target is too simplistic in a fluid market..

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12 minutes ago, u0362565 said:

Thanks THT, yes well i do estimate my possible returns by estimating a target price.  Of course if the market doesn't get there then i've got several smaller rolling losses to deal with and i've not figured out yet how i make up for that if it turns out i'm wrong.  I'm currently not using a trailing stop for simplicity and the sake of not adding another variable into the mix.  However, I imagine that only having a binary situation where the market either hits the stop or target is too simplistic in a fluid market..

Hi - there's nothing wrong with having target level(s) - If it works it works

Just remember as in chart 1 above, if the market is going UP then it will create a series of higher lows and higher highs and one can trail the market up by simply using the swing low points - because if the market is trending upwards it ain't going to hit a swing low point until it needs a rest, changes degree or the trend is changing

That's a major law of the market (vice versa for it going  down and for sideways ranges overlapping of swings) 

The blue dots on chart 1 show you the times the presumed swing low/low didn't work out

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