Using ATR to Choose Your Stop Loss

Is Your Trading Growing with the Market?

Going far with ATR

Have you back tested a trade zone that doesn’t match the current Futures market? Having problems recognizing the current market? Many traders at FNL have experienced a similar discomfort as the market that built a foundation for them is nowhere to be found. Inexperienced and inflexible traders often view the current ES and other commonly-traded indices as “too volatile” or “crazy” every single day of the week. Is your trading able to adapt with a growing market? Or are you stuck on the sidelines hoping for an old zone to reappear? Many won’t like to hear this, but if you have one trade setup and it only shows up one day a month, then you don’t have a zone- you have a wish list.

Traders at FNL have utilized a few tools to help them identify which market they are showing up to on any given day. In order to trade the current market, the first step is realizing that often the same price action patterns we’ve all seen in past years are still reflected- just BIGGER. So recognizing which arena you’re in and identifying the correct strategy proves vital to surviving the growth and flexibility of the current market. One specific tool that has helped traders almost universally is the ATR indicator.

ATR stands for Average True Range and is indicative of the average size of a candle over a given period (standard 14). Simply put- ATR is the average size of current candlesticks on the chart and can be an instant tell of what arena you’re showing up to any given day. ATR can be used in conjunction with a trader’s awareness of trends and pullbacks to give an idea of which strategy to utilize.

ATR is at 9.62 in the above image. This represents an average candle size of 9.62 points over the last 14 candles on the chart.

Speaking from a foundational perspective- ATR is great at narrowing down which strategy to use as a base risk-management trade (p3s2, p4s3, p7s5, p10s7, p12s8, p15s10- all contracts tied into one stop and profit set). I listed a few common strategies that many traders build a foundation around, but each trader here and elsewhere must decide and prove their own strategies for themselves.

So how can ATR help?

Learning to weigh together the strength of trend and other factors using ATR as an anchor for a stop has helped a few to choose exactly which trade to take each time with confidence. Each trader must hypothesize and back test to prove to themself that what he/she sees works, but at FNL we pride ourselves in a level of selflessness to try and help each other understand the concepts we are testing with hope that others may succeed as well.

My Trading

I like to use ATR as a go-to for my stop size and choose within the 3 or 4 closest strategies by utilizing a balance between ATR and a collective of other indicators and market trend awareness -these are grouped together and referred to at FNL as PSR(Position, Situational Awareness, Risk management). In a relatively strong trend, I’ll choose between the base strategy and the bigger strategy- increasing my odds not only to enter the position, but also enter that position with a clear stop in strong emotion. On the other hand, a weak trend may cause me to lean from the base strategy to the smaller one. Weak trends necessitate good position while trading to ensure you have a profit target within the expectation set by the trend (or lack thereof).

The best explanation I can give may be a couple examples-

-If ATR is around 3 then I most likely will take a p4s3, but I consider both a p3s2 and a p7s5 as well.

-If ATR is around 6, then I’ll choose between a p7s5 and a p10s7- knowing that I may lean as small as p4s3 or as large as p12s8.

-If ATR is around 9- then I'll choose between a p12S8 and a p15s10, knowing that a p7s5 or p18s12 might be acceptable as well.

If the trend is unusually strong in the previous example with a 6 ATR, then I may lean toward the bigger strategy at p10s7 to ensure I get position in a move and clear a stop. In stronger trends, asking for a new HH or LL to be made is often a reasonable ask for a profit target.

If the trend is weak, then I’ll lean toward the smaller strategy in the event the base choice doesn’t fit within the perceived expectation set by the market.

Here’s an example of a trade taken on a live market using the ATR to choose my strategy this week (simple chart)

In this example ATR is just under 10 at the time of the trade. My base choice is a p15s10, but I choose between p12s8, p15s10, and p18s12 as a go to unless I see that these do not fit. In this case I chose a p12s8 due to a shallow retracement and not asking for too much to hit my target profit.

Target Hit! +12 points profit on this trade.

The ATR strategy for a stop carries over into trades that I would scale out of and extend as well (still based on an expectation set by the market). The original entry point and number of contracts often remains the same whether using a foundational base trade or extending a trade to the moon and scaling out.

The final decision for my strategy is at my discretion (the same applies to you)- again balancing strength of trend and other indicators to make that final decision. Maybe add ATR to your own charts and just watch to get a feel for how ATR changes with the size of the markets you like to trade?

I’ve found ATR especially helpful throughout the SP500, Russell, and NASDAQ Futures markets with current swings in volatility.

Using ATR can be the difference in feeling lost on a chart, and being able to hop comfortably into any market or index and utilize the same trade zone that you’ve built and trust; assuming you recognize the patterns as your trade zone.

How do I know if it works?

ATR is just one indicator in a sea of different ways to trade, and ATR may not be relevant to or change your trading in any way.

The underlying goal of trading is to find a repeatable zone that you can trust over time.

In order to prove such a zone to yourself, you might have a set of rules that you back test and sim trade to prove without a doubt what you are seeing is working to your standards.

Bottom line- you trade for yourself- don’t trust anyone. Instead, take different ideals that may apply to or expand your trade style and test them to continue evolving as a trader over time. You can respect different traders and not have a blind trust in them- listen and prove to yourself that the way you interpret information works for you. In this way you’ll give yourself the best chance of building a repeatable trade zone that you consistently identify and cannot be shaken from.

Trade well at FNL!

Travis H

FNL Trader/Presenter



FNL content including, but not limited to, articles, podcasts, videos, live streams, and websites are intended for informational purposes and should NOT be considered financial, investment, nor trading advice. Cryptocurrency, futures, foreign currency and options trading contains substantial risk and is not for every investor. An investor could potentially lose all or more than the initial investment. Risk capital is money that can be lost without jeopardizing one’s financial security or lifestyle. Only risk capital should be used for trading and only those with sufficient risk capital should consider trading. Past performance is not necessarily indicative of future results.

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