≈ Not too tight, not too close≈
Traders,
One common tool used by traders to ensure their stop loss isn’t too tight or even too loose is Average True Range, or ATR for short. It tracks the average size (or range) of each candle and reflects how volatile prices are on a typical day.
Suppose a stock is trading at $100 and has an ATR of $3. If we placed a stop loss closer than $3 away (say, at $98), then we run the risk of getting stopped out on noise. To avoid this, many traders like to keep the stop at least 1 ATR away. Going 1.1 ATR away is common. In this example, that would place the stop at $96.70. In other words, we put the stop ($3 x 1.1) below the $100 stock price.
The logic here makes sense. To get stopped out the stock must make a larger than average move in the wrong direction. Doing so that the selling pressure is substantial and not just garden-variety chop.
With this concept now understood, we might craft a set of rules for stop placement like so:
Step One: Place the stop loss below a support zone. It should be at least 1.1 ATR away.
Step Two: Wait until the stock moves 1.1 ATR or more in the right direction before moving the stop loss to your breakeven point.
Step Three: Once the stock rises to the target, place the stop loss 1.1 ATR away and continue to move it higher each day to maintain the 1.1 ATR distance.
#TeamTackle
Chart of the Day
Facebook and ATR
Facebook had a bull retracement pattern on May 6th. It closed the session at $320.02 and had an ATR of $7.86. If we placed our initial stop 1.1 ATR away ($8.64), it would go at $311.38.
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