Has this ever happened to you? Your trading strategy gives you all the signals to enter
a trade, so you enter. The chart is looking extremely nice, and you re confident the price
is about to go up. You set your stop loss, set your take profit, and then have you eyes
glued to the monitor. It turns out you were right about the chart
going up, but unfortunately, the price barely hit your stop loss before doing so. Resulting
this as a losing trade, and most importantly, missing out on all this potential profit.
What if there was a way to know exactly where to set you stop loss? To have an indicator
tell you the exact position where to set it, so it lowers the chance immensely of it ever
getting hit. Well lucky for you, there is a way. And I
m going to tell you exactly how to execute it on all your trading strategies.
Let s get straight to it. So here we have our rookie trader. They saw
their indicators line up, so they entered a trade. They set their stop loss at the recent
swing low. Thinking it was a good idea, because if the price does go below the swing low,
they want to be out of the trade anyway. Then we have our professional trader. Who
entered the trade the same price, but used the special strategy I m about to share with
you to set their stop loss. Look what happened.
The rookie trader ended up losing this trade, and the professional came out with a huge
profit. Even though they entered at the exact same price. The only difference, is the position
of their stop loss. So what is this mysterious indicator that
will help you place your stop loss and lowering the chance of it getting stopped out?
It is the ATR, or the average true range. I use this indicator in basically all of my
trading strategies to help decide where to place my stop losses.
We are going to talk about what the ATR is, why you should be using it, and how to implement
it in your strategies so you set your stop losses at the correct position every time.
So what is the ATR? The ATR is the average true range. What this indicator is doing,
is taking the past 14 candles, and is telling us what the average size of those 14 candles
is. Now whenever you add this indicator to your
chart, you can change the settings of it to whatever you want. So you can make it look
at the past 50 candles, or 5 candles, whatever number you wanted.
Me personally, I like keeping it at the default of 14.
So this indicator on the bottom is the ATR indicator. It s just a simple line chart,
that has a changing value in the top left. This number is presenting the average size
of the past 14 candles of this specific security, which is Etherium.
So it s saying, the average candle size of the past 14 candles for Ethereum is $17.32
Now, why is it important to know the average candle size of the past 14 candles?
The simple answer is knowing the recent volatility of the market.
Let me show you an example. So say just for simplicity sake, you wanted
to enter right here. You want to set your stop loss right below this recent swing low,
which is actually what a lot of other traders are doing.
And lets say, you think, to prevent the price from hitting your stop loss, you are going
to move your stop loss down $10 from the original, so if the price does go down to the recent
swing low. It still has a chance to bounce off, and go back up.
While you re strategy is some what in the right direction. Let me tell you why this
will not work. Every crypto, every stock, every currency,
is going to have different amounts of volatility. So bitcoin is going to move up and down a
lot more than a blue chip stock, like apple. You don t want to be moving your stop loss
down the same amount for crypto as you would a blue chip stock. Considering they are two
completely different markets, and have way different price movements.
Depending on what your trading. Your stop loss might have to be larger or smaller.
Same goes with different time frames. Here you can see the average candle size of the
past 14 candles for bitcoin on the 15 minute time frame is $200, but if we move to the
daily time frame. The average candle size is $3000.
So this is a perfect example of why you need larger stop losses on higher time frames compared
to smaller time frames. You also want your stop losses to be as effective
as possible. Like this. So lets say, we know there is a great probability that the price
will fall a lot if it goes below this line. But, we also know that we have to take volatility
into consideration. But we will say the price can go below this
line the amount of an average candle from the past 14 candles. But we don t want to
just guess the average size, because if we do any more than what the actual size is,
that s just wasting extra money. We want our stop loss to be as precise as possible.
This is where, ATR comes into play. First things first, get on your chart platform,
I use tradingview, I ll leave a link in the description.
Go to the indicators tab, and type in ATR, for average true range. This will put the
atr on the bottom of your screen. Now it s also important to note, this value
in the top left will change based on where your cursor is. So if you have your cursor
in the middle of the chart, it s taking the past 14 candles to the left of that line.
So when reading the ATR, make sure your cursor is all the way to the right of price, or off
the chart completely So in this example, this number, is the average
candle size from the last 14 candles for etherium. So once you find where you want to place your
stop place, say this recent swing low for example. Instead of dropping your stop loss
a random amount below that level, you should be taking volatility into consideration.
So what you do, is take the price of the stock, crypto, or whatever your trading. And subtract
it with the ATR value. So in this example our stop loss level is
at 4339 and our atr value is 16.02. So what you do is take 4339 and subtract 16.02 from
it. Giving us 4,322.98. This is the new level of where we are going to be setting our stop
loss So in this example .
So yes, we do have a larger stop loss, but that s the whole point. We don t want to get
stopped out because the market is more volatile than we thought.
Let s do one more example. So here we set our stop loss at the most recent swing low,
which is at 310 . We then see what the ATR value is, which is 2.58. We then do 310.75
2.58 which equals 308.17. 308.17 is where we move our top loss too.
If you use this strategy for placing your stop losses. It s pretty safe to say your
stop losses wont be hit as often. So for all my strategies, where I say to set
your stop loss at a certain point. You should be adding the ATR to it, to give it that extra
amount of room for volatility. It will help the strategy perform so much
better. Try it with this strategy. Where I made a
130% return in just 2 months of trading. It s a crazy strategy and is insanely powerful.
Thanks for watching, and ill see you guys next time.