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00:00Wednesday I talked about why you want to use the ATR for targeting. Today let's
00:05talk about using it for stop losses and following stops. I also want to talk
00:10about reward to risk ratio so hang around.
00:30Hi this is Tim from TradingStrategyGuides.com. I think my voice is getting a
00:40little better but it's still just a bit raspy.
00:43Thanks for your patience on that one. I had a couple of you respond to
00:47Wednesday's challenge. I know you guys get it and you're on your way to big
00:52things. Congratulations to you guys. Today I'm going to talk about using the ATR for
00:57setting a reasonable stop loss. I'm also going to cover the issue of reward to
01:02risk ratios. After that we're going to take a look at the daily setup of
01:06another old friend, Dish Network, the satellite television provider. But first
01:11I want to show you about our weekly US dollar Mexican peso setup which could
01:16trigger today and then later on the trading maximum for today. It's Friday so
01:22let's get on with it.
01:24Remember to click the subscribe button and hit that bell so you don't miss any
01:27of these great trading techniques.
01:30Alright let's look at charts. You may remember back at the beginning of
01:34November I showed you this triangle on the weekly US dollar Mexican peso
01:39forex pair. Well here you go. It's the end of the week and it's looking like we
01:45may get our close below the triangle right here. I'll look at it again just
01:50ahead of the 5 p.m. US Eastern Time close today and if the price is still below
01:55the triangle I'll sell it. Don't miss this. I think it could be pretty big. You may
02:01remember from last week's videos that I've already gotten profit on the Kiwi
02:05Swiss and now I'm just watching to see what result we would have gotten from
02:10using the parabolic SAR to follow stops. Doing that we would move our stop to
02:16right here roughly 64.29 locking in 40 pips on this. If it keeps pushing up like
02:25this we'll be in a position to have made more on this one with the PSAR stop
02:31following than we actually made on this trade.
02:34Ok I'll show you the DISH network setup shortly. First I'm going to show you how
02:38I use the ATR for setting up the initial stop loss and then I'm going to talk
02:43about reward to risk ratio. Today I'm going to show you how I love the average
02:48true range or ATR for setting stops and again it's because I like the fact that
02:53it auto adjusts your stop loss based on the market and the time frame. I hate
02:58having to remember specific stop loss levels for all the different markets I
03:02trade. I'm going to explain this in gory detail. Again I apologize to all you math
03:08nerds out there for which all of this will be obvious but this is for the
03:13folks that struggle with math. So you number people plug your ears and sing
03:17loudly to yourselves for a few minutes. You've heard me say it in many a video
03:22the ATR is simply the average length of the last 14 candles. I told you on
03:27Wednesday that I use a 14 period moving average of the ATR. So in all the cases
03:33where the market closes over the weekend which is most of them we're talking
03:37about the last three weeks of trading. The ATR measures the length of each of
03:42the last 14 candles adds them all together and divides that number by 14.
03:47So the result is a moving average that adjusts for the volatility of the last
03:52three weeks. When volatility declines and we call that market compression that's
03:58just a fancy way of saying that the price doesn't move around as much. When
04:03volatility declines a fixed size target is far less likely to be hit. When
04:08volatility increases called market expansion and the price moves around
04:13more your fixed stop is more likely to be hit. Neither of these situations is
04:19ideal. For example what if you want to try out a strategy that you like on the
04:24daily chart and you want to try it on the four hour chart or the hourly chart.
04:27How do you adjust your stop-loss to handle the shorter time frame? Well
04:33Wednesday I showed you charts of the pound Australian dollar with a daily ATR
04:37of 138 pips and four hour ATR of 48 pips. Then I showed you the euro USD with a
04:45daily ATR of 41 and a four hour ATR of 14 pips. So as you can see the ATR will
04:53adjust automatically for your market and for your time frame. Not only does it
04:59lend itself to targeting your trade but also setting your stop losses as well. If
05:04you've followed this channel for more than a minute or so you'll know that
05:08almost invariably I use one times the ATR for my first target and one and a
05:13half times the ATR for my stop-loss. I had a question of one of last week's
05:18videos about my reward risk ratio being less than one. In other words my stop
05:23loss is larger than my first target. It's not the first time I've been asked this
05:28question and I'm sure it won't be the last time and you guys know that I'm not
05:32afraid to be a little controversial so don't hesitate to agree or disagree with
05:36me in the comments below. Here's the controversy. Reward to risk ratio alone
05:42doesn't tell you the whole story about your trade. It assumes way too much about
05:47your strategy. To make matters even worse if my trades hit the stop-loss the
05:53whole position is off the board for a full 2%. If my target is hit only half my
05:58position is closed for a profit of about two-thirds of a percent with the rest
06:03set to break even. So a trade that hits the target and drops will close with
06:08only 0.67% profit. I would have to close the whole trade at the target for the
06:14reduced reward to risk ratio to actually be a thing. So if you don't look
06:18at the whole picture then I can understand your concern with the reward
06:22to risk of 1 to 1.5. But there are other factors at work here. First of all a
06:28straight reward to risk ratio of 1 to 1.5 can be extremely profitable if your
06:34win rate is higher than 60%. So what is the secret to my strategies? Well I rarely
06:40hit a full stop on my losing trades. So functionally I'm using a much larger
06:45reward to risk ratio than my initial numbers reveal. I know you guys have seen
06:49my trade spreadsheet before. The red lines are the ones that hit the full
06:54stop and that's only happened nine times out of 86 trades since I started doing
07:01the videos last April. So roughly 10% of the time. Here's a myfxbook page of my
07:09control forex account. This is a demo account that I use to control several
07:14other accounts. I don't keep all my money at one broker for safety reasons so I
07:18control them all with trade copiers. This is a daily strategy that I spend about
07:2415 minutes a day working. I use the same trade management on this as you see in
07:29my videos. It's up 36% since late April. You can see we had a really nice windfall
07:35in August. This is where a trade management strategy like this shines.
07:40Allowing your winners to run will set you up for days like that. Obviously it
07:46doesn't happen every month and sometimes we get a bit of a drawdown like we did
07:50right here and right in here. But here are the stats. You can see right here
07:57that my win ratio is actually below 50%. 47% actually. But take a look at the
08:06average win $75 and the average loss $43.50. That's the functional result of my
08:16trade management rules. I close most trades long before they actually hit the
08:21one and a half ATR mark. I hope you guys understand what I'm saying. The initial
08:27reward to risk ratio doesn't tell the whole story and sometimes trying to get
08:31two to one or three to one reward to risk can kill your overall strategy. So
08:37definitely experiment and test, test, test everything you do. You're not tired of
08:42hearing that one yet are you? Okay let's take a look at the Dish Network setup.
08:48Dish Network has been in this huge triangle on the daily chart since way
08:52back here in September. It's a well-defined triangle that's about one
08:57half complete right here. Typically these won't break until they reach two-thirds
09:03or three-quarters of their completion. We've got a little bit of decline in the
09:09volume and the volatility here. So I'm not thinking it's quite ready to break
09:16out but watch it anyway. Here's the trade plan. We'll buy a daily candle close
09:22above this triangle or sell a daily candle close below the triangle. To enter
09:27a full size position on the breaking candle you want to see the volume bar
09:31reach up to the volume average right here. If it doesn't quite reach the
09:36average but does reach at least 75% of the average you can open a half size
09:41position to reduce risk. You can calculate that percentage by taking this volume
09:46number dividing it by this volume average and you should get at least 0.75.
09:52If you don't get at least 0.75 don't enter the trade. As I mentioned the stop
09:58loss is one and a half times the ATR and the first target is one times the ATR. So
10:04let's say this is breaking to the downside and you get the candle close
10:10right here and that's your entry point. You look down here on that very candle
10:15to get the ATR. You multiply it by one and a half and you measure that distance
10:21above your entry for your stop loss and then you measure one ATR below your
10:29entry for your first target. Just the opposite of course if it breaks to the
10:34upside. Now here's the key of what I was talking about with the reward to risk
10:39ratio. If after entering the trade we get a candle close back inside the triangle
10:45we will take the loss right then and not wait for it to hit the stop loss. We
10:51intend for this to break out explosively and hit our target quickly. If it doesn't
10:57we want to close this trade down without it hitting the full stop. When the price
11:01hits our first target we'll close half the position for profit and set the stop
11:06loss to break even on the remainder. We will then follow stops as price moves in
11:10our direction until the market takes us out and that is what will allow us to
11:15ride a long explosive move out of this triangle. Typically I do this using two
11:21positions. The first position has a stop loss and a take profit on it. That
11:26position will close automatically when the first target is hit. The second
11:30position will have only a stop loss associated with it and that's the
11:34position that will be allowed to run. When the first target is hit we will
11:38have to manually move our stop loss up to break even on the second position. I
11:43will only risk about 2% of my account on each trade and that's the new setup on
11:49Dish Network. My intent here is to tell you how I manage these trades. If you've
11:54already got a good trade management plan use it. Things that work for me may not
11:59work for you. You have to understand your own mind to find the best strategies for
12:03your trading and that's also my intent for the trading maxims. To help control
12:07my emotional impulses and keep me on the straight and narrow path. A maxim is
12:12a general truth, fundamental principle, rule of conduct or proverbial saying. The
12:16purpose of my maxims is to motivate me to discipline in trading as well as
12:20other areas of my life. I suggest you start your own list of maxims. Things
12:25that you can say to yourself while you're trading or doing life to make
12:28sure you always do the right thing. Feel free to borrow from my list. And today
12:33Tim's trading maxim number three. Never bet the farm. You should never allow any
12:38one trade to make you or break you. You hear me say this just about every video
12:43during the trade setup. For those of you who are not natural English speakers
12:48never bet the farm means you should never wager anything that will change
12:52your lifestyle if you were to lose. For example you shouldn't bet your house or
12:58car or even just your house payment or your car payment. We call that scared
13:03money. You will never manage it properly because you will be afraid to lose it
13:08the whole time you've got it on the line. And no trade is ever 100% sure. Anyone
13:14who tells you that is lying to you. Manage your risk properly and you can be
13:19a successful trader and that means keeping your risk small. As I'm sure
13:24you've heard me say I risk about 2% on each trade. That's 1% on each of the two
13:29positions that I put in place when I open a trade. I say about 2% because
13:35sometimes you have to fudge that by a small amount to have even lot sizes or
13:39whatever. Remember no single trade should make or break you. With that having been
13:45said I've had single trades that made my week and even my month but not because I
13:50risked a lot on it but because I rode the trend for a long time. That's the way
13:55I like to do it. Remember our daily dish network trade plan here. We're going to
14:00buy a daily candle close above the triangle or sell a daily candle close
14:04below the triangle. If the volume is not quite average go half size as long as
14:09it's at least 75% of the average. Your stop loss is one and a half times the
14:14ATR and your first target is one times the ATR. And remember to click the link
14:19below to the trade management video for more details. Sign up for my free trading
14:24picks email list so you can be sure that you won't miss any of these great
14:28trading picks. I send out about three or four trading picks a week from all
14:32different markets and you'll get to see them first. And the best thing about it
14:36is it's free. I'll put the link below this video. Be sure to come back to
14:41Trading Strategy Guide's YouTube channel every week on Monday, Wednesday and
14:45Friday at 3 p.m. US Eastern Time for my new videos. We'll have a nice trade set
14:51up or two on each one and maybe some extra Q&A or training. Don't hesitate to
14:56ask any questions you may have. I'll either answer your question right in the
15:00comments or in a training video like today or both. And remember the only
15:05stupid question is the unasked one. As always thanks for watching, thanks for
15:10subscribing and don't forget to hit the thumbs up below. Have a great weekend
15:15and I'll see you next week.