ATR is a tool in every charting program (including SlopeCharts) that will calculate the most recent average true range of price based from the past 14 time intervals. When transitioning from calm to volatile market conditions, ATR will expand with price volatility. And conversely, it will contract during periods of price contraction.
You can go into the setting of the ATR and increase or decrease its length. I tend to visually look back twenty to 30 intervals manually, (by eye), yet set the ATR to the length 14 intervals. Consider this measure as a tool to measure a decent second target. A 14 interval ATR is specifically based on the interest in a healthy second target in anticipation of price volatility. Yet if price is contracting for more than 14 intervals and about to break out, length 14 will not reflect the most optimal second target price. That is why your eye looks to the left to recognize price potential. At some point, hopefully, you will learn that ATR is similar to training wheels when learning to ride a bike.
With a length 3 interval, ATR in the high flying price action, presented recently on 9-3 and 9-4-2020, ATR was anywhere from, (a staggering), 10 to 16 with some 21 point moments in there. With a length 20 interval, (those same 2 days), ATR was 6 to 13. To keep things in perspective, (though), take a look at the ATR August 31, a quiet back and forth choppy narrow range day and with a length 14 period ATR of 2 to 3. So- on a quiet day, a second target could, (should), be less ambitious.
My second target during this high flying price action 9-3 and 9-4-2020 was a meager 4.25 at every entry. It just felt right.
Yet that miscalculation was a simple consequence of market price action disbelief and the sanity to not be aggressive with a truly unforeseeable future.
Play it measured safe
As with all price and time based indicators they are just that- a creation of both HISTORICAL time and price to provide you with a, (hopeful), manageable future measure of what the empty space to the right of the chart will become. Consequently, ATR, as all indicators, are a reflection of history and thus should only be used to predict the potential of what may occur into the invisible future.
If you are trading the hot and often high octane instruments of futures, forex or commodities you are likely going to want to have pre determined measures of price volatility available to accommodate your price action predictions. You want this measure to be as accurate as possible. Consider setting the ATM’s, (automated trade management), at three levels of volatility. Low, Medium and Hot. Low is for Globex and middle of the day doldrums trading. Medium is for when volatility appears at Globex, (Asian close/ Europe open), and middle of the day range or channel trading. And hot is for the cash open, mid day times of reversal or continuation and the close.
Therefore, it is incumbent upon you to measure volatility, recognize as early as possible, market conditions in context and instruct your ATM to bank its first target and/or protect you, via a stop loss, against inevitable spikes and snapbacks measured.
Volatility Spikes or Doldrums- Think Goldilocks
One question could be, do you want a hot setting of ATR ATM during calm markets? The answer is no. At a quite market you nonetheless have to expect the random inevitable unexpected volatility spike that creates an interval far greater, (high to low), than any of those in the ATR measuring the recent price action history. Thusly, if in a trade, when a volatility spike occurs your targets or you stops will be hit immediately.
Conversely, you wouldn’t want a low setting in a volatile market. When volatility strikes, its expected for price to pop higher and lower than in recent so you have to create the room for the correct targets and stops.
The simple goal is to hit more first targets than stop losses at a proportion of 60% first targets to 40% stop losses. This measure assumes you are taking 2 lots, (half off), at the first target.
Measuring second targets and protecting the winner
Now that your first target has been banked its off to your second target. This target should be based on some of the higher intervals the ATR used. Because you made the correct decision, proven by your first target banked and with your stop loss moved to entry, it’s important to reach out to the second target with impunity. Measure both the potential of a good close of the current interval and the potential the next interval will be continuation. Simply, you are winning and it’s time to get some more. And simply, consider the importance of going for just a little more rather than a whole lot more.
As an exercise, take a look at ATR at different days in the market and realize the second target size from utilizing ATR. Inside days where price remains within the high and low of the prior day will likely offer smaller measured targets and stops.
The Runner (Barney) and stop adjustments
The runner can be a target of many reasons. On the safe side, it could simply be an equivalent measure from the ATR as utilized in second targets. Yet, if you suddenly recognize the potential of a trend, that, you may be discovering yourself in, you might look to lofty targets. Perhaps now is time to target a known area in price. Perhaps the runner target could be highs, Lows, opens, closes, range tops and bottoms or particular moving averages . Perhaps and maybe more importantly it is simply best to trail behind price 3 intervals. Simply, ‘get it in the hand’!
If, in a tight range, the market may not give you much and so perhaps you leave your stop at entry. Perhaps you move your stop to the second targets entry. Perhaps, if you are feeling it, you move your stop to break even. The runner gets to spend time in the market and it tends to do everything and anything imaginable- so you decide- do you ‘swing for the fences’ or do you ‘grab one in the hand’.
The goal is to be correct 60 times against wrong 40 times so if you are that, than perhaps ‘one in the hand’ is better than ‘swinging for the fences’. After all you can always get back in.
Additionally, and perhaps most importantly, it’s not so good for your runner to blur the market swings and reversals. Runners are for continuation so higher lows or lower highs and let Barney run. Otherwise, get out and get ready for the next opportunity to win or lose.
Note from Tim: you can search the Slope comments database on this topic by clicking here.