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How ATR Stop Loss Strategy Can Improve Your Trading?

How Average True Range (ATR) Can Improve Your Trading?

Average True Range known by the acronym ATR is an indicator widely used in technical analysis in financial market analysis and measures volatility in the market. ATR has been introduced by Welles Wilder Jr. in his book New Concepts in Technical Trading Systems.

In this article, we’ll discuss how the ATR can help improve your trading and how to use ATR as a stop loss.

Size/range of the ATR

As the range varies, it is important to take a designated value as a measure of market volatility. For this, the generally accepted practice is to adapt the best of these: current high less the current flow, the current high absolute value less the previous close, and the current absolute value. You need to take the average actual range. It’s more than a moving average. It is determined by using the true range for 14 days.

In this image, we can see on the Daily chart Average true range. As you can see GBPUSD is in rising volatility. Price is going down but volatility is high. It is because of Coronavirus news.

Today, 229 pips are the daily range and a just week ago it was around 80 pips.

Determining ATR

As a trader, you can use a short period of fewer than 14 days to accrue trading signals. This is because longer periods are likely to generate fewer trading signals. Suppose, for example, a short term trader wants to evaluate the volatility of a stock during a five-day period.

The trader could have to estimate the ATR for the five-day period. As prices are arranged on the chronological order, the trader gets the absolute value at the maximum level at the current high minus current low, the absolute value of the current high less the preceding close and the absolute value of current low less preceding close.

Calculating ATR:

Average True range = ATR = MAX (BarHigh, PreviousBarClose) – MIN (BarLow, PreviousBarClose)

Average true range stop loss you can calculate as Daily ATR percentage or Weekly ATR percentage.

By default, ATR indicator settings are 14 days. In trading, some traders use 24 or 30 too.

As an indicator of the absolute size of the trade

What does the ATR tell us about?

The author of the ATR had the intent to measure the volatility in the commodity market widely known for its volatility. However, note that ATR can also be used to measure the volatility and in stocks and indices.

The way it’s used in the stock market is this: when a stock experiences high volatility, it is going to cause a higher ATR. Contrary to this, a low volatility stock assumes a lower ATR.

Market experts may use the ATR as an instrument to influence investors – they can advise the latter to exit trades. They can use it as a useful instrument to add to a trading system.

ATR is a helpful tool for market analysis to more correctly scale the volatility experienced on a daily basis for any asset. This involves using plain calculations.

Be aware that the indicator does not imply the direction price moves. It can show you the amount of volatility as a result of gaps and the limit that the market goes up or down.

It’s also important to note that the ATR is simple to calculate and for this, you need to data on price on a historical basis. The starting step to calculate the ATR is finding a series of true range values for an asset.

Using ATR for exit and entry

The ATR is widely used as exit and entry determiner in markets when making such decisions. A commonly used technique is called chandelier exit invented by Chuck LeBeau’s. The chandelier exit works thus: it reckons a trailing stop according to the highest high the stock reached since you entered the trade.

The gap between the highest high and the stop is equal to multiple times the ATR. Thus, you may subtract ATR three times from the highest high at the start when you entered the trade.

So how we can use ATR stop loss for the forex stop loss indicator?
We can set out a stop loss in the function of ATR.
For example :
You can set 20 pips for stop loss if today is 100 pips average true range. But even better you can do:
Instead of 20 pips you can set stop loss to be 0.2 Daily ATR. So if today is 100 pips range it will 20 pips, but if it is 150 pips range it will be 30 pips stop loss. Your stop loss is following the current market average true range.

So in your forex stop loss indicator, you just need to set stop loss to be as a function from ATR.

The ATR can also help decide how much you should devote to derivative markets. This is important. You can use it to measure the trader’s amount of inclination to embrace risk and the volatility in the market.

ATR can help in day trading

If you use the ATR as a tool in the day intraday trade chart, the ATR is likely to increase steep following the market’s opening. The ATR spurts even at the beginning of the day thanks to the high volatility at the moment. The ATR can show that the volatility was more than the preceding trade day.

Once the ART reaches the maximum level, it progressively declines all day. Of course, the fluctuation in the indicator may not provide any information barring the price and its average value at any minute. Likewise, the ATR can show how much each of your assets moves and its moving trend.

You can use the ATR to determine the price reached by your asset at any minute. Such analysis is helpful in predicting the tendency in the market movement – the probable trend.

How you can use the ATR forex indicator besides entry and target?

The ATR shows the actual movement in price tendencies. To determine the time that price takes to reach profit live, divide the profit you expect by the ATR. So you can connect ATR and profit as well.

As a guide to exit the market

You can use the ATR to leave the market if you find the price of the assets moves against your expectations. It can guide you when you should decide to exit the market.

By this, you can protect yourself against potential loss, by knowing the market movement tendency beforehand.

How it works

You need to take note of the ATR value at the moment. You can find out the suitable limit by just double the ATR. Thus, when you buy a stock that is losing you can arrest the loss at ATRx2. The loss increases and reaches the peak level and stays there until the close of trade because of the drop in price that could impact the stop loss level. For short trades as well, this mechanism works.

Conclusion

The ATR indicator is a great tool that helps traders determine the right amount of money they should devote at the right time. Of course, you should have enough exposure to the market – how to use the tool and the potential impact on the ultimate findings. By using the tool judiciously you can protect your money without having to spend a lot of time that would otherwise you squander. You can, thus, start trader on the day and you can also sense when you should devote more money to the market and you can sense the threatening perception and exit the market.

How to Read a Bar Chart for Day Trading?

March 10, 2020 by Fxigor

How to read bar charts stocks or forex bar charts?

Most traders are busy and do not have the time to analyze all the statistical data available. They are interested in using graphical charts that represent the data available, to help them make trading decisions. The Bar Chart for Day Trading is one of the most popular charts used by day traders. These charts are easy to interpret and read. The bar chart will have an opening foot facing the left, the closing foot on the right side. The bar will have the open, close, high low price for the specified interval which is defined by the trader who is using the chart.

Bar charts:

Day traders often opt for a one-minute bar chart, and a new bar is formed every minute with the prices for each minute. The trader can choose the interval for the bar chart as a specified number of transactions, or anything other than time. If the number of transactions is considered instead of time, the chart is called a tick chart. in this chart, a new bar is formed only after a specified number of transactions in the asset are completed. the bar charts are used to detect upward, downward movements, and price variation for the bar period. Day traders who assess the price movement using the bar chart and take decisions accordingly are called price-action traders.

Reading a bar chart

The bar charts have information on the opening (O), closing (C), high (H) and low (L) prices of the asset during the bar duration and are called OHLC charts. HLC charts are also used, and these have a high price, low price, and closing price information

Open

The opening price is the price at which the asset is traded during the bar, and the horizontal foot on the bar’s left side indicates the opening price.

High

The high for the bar is the highest price at which the asset is traded and is denoted by the top of the bar

Low

The lowest price of the asset during the bar is low, and is denoted by the bottom point in the bar

Closing

The price at the end of the bar period is close for the asset and is denoted using the horizontal foot, towards the right side.

Direction

The direction of the price of the asset can be determined by comparing the closing and opening feet in the chart. If the closing foot is higher than the opening foot, the price is moving upward and if the closing foot is below the opening foot, the asset price has moved downwards. The locations of the bottom, top of the bar chart are used for range calculation. The range of asset price movement is obtained by subtracting the low from the high.

Conclusion

Reading a bar chart requires some practice, especially if the prices fluctuate very fast. The chart opening is on the left, closing on the right, with the vertical showing the high and low. The bar chart will also include the transaction volumes for the asset, which may be shares, futures contracts, forex lots. Traders should also consider volumes while taking a decision. There are other types of charts like candlestick, Heiken Ashi and Renko charts which are also used by traders.

Understanding Currency Interest Rate Differentials

by Fxigor

The interest rate differential has defined as the difference in the interest rates for each of the two currencies in the currency pair. Each currency has its own interest rate and the difference between the interest rates are the rate differential. In foreign exchange (forex) markets, the differentials or forex interest rate differentials are of interest since they affect the pricing of a particular currency. Purchasing a currency which is having a higher interest rate is profitable, since the trader will get daily interest payments. This forex purchase is defined as carry trade or earning carry on the rate differential. Since 2010, changes in the economies worldwide, have resulted in negative interest rates in some countries and people are more interested in the differentials in interest rate.

For example, you plan to buy or sell the USD/JPY for 2-years. You will either receive 2.68% when you try to buy the dollar or pay away 2.68% if you buy the yen and sell the dollar. This exchange differential exist because the 2-year US rate is 2.50% and the Japanese 2-year yield is -0.18%. If you buy the US dollar and nothing happens for 2-years you will earn 2.68%. If you buy the Japanese yen currency pair and sell the dollar and nothing happens for 2-years you will lose 2.68%. This example is based on interest rate differential.

Negative interest rates

Since 2014, economists have noticed a major difference in the interest rates for the economies of developed countries and the economies in emerging markets. The economies in developed countries reduced their interest rates to below zero, in an attempt to increase demand for products and services. On the other hand, the emerging market countries increased their interest rates, hoping to prevent instability in the economy and reduce the outflow of capital. For example, in February 2016, Banxico, the central bank of Mexico, in an emergency meeting decided to increase the rate for borrowing by 50 basis points. It also sold United States dollars at the applicable market rate, to increase the demand for the Mexican peso, whose value was falling. This decision increase the difference in the interest rates of Mexico and the United States. The market interpreted this decision by the central bank, as a sign of desperation or instability to prevent chaos in the global market. This is how forex interest rate differentials can change a lot of things.

Carry trade

Forex traders try to take advantage of the below-zero interest rates in some countries with carry trade. The forex traders are selling currencies having negative interest rates like the euros and Japanese yen and using the money to purchase currencies with a high-interest rate like the Indian rupee, Mexican peso, South African rand, or the Turkish lira. Theoretically, these trades may appear very profitable, due to the very large differentials in the interest rates of the countries. However, in reality, these may become extremely risky if the economic problems in the emerging markets continue or worsen.

Forex traders should be aware that historically it is observed that there is often a change in the spread for the currency pair, and this could neutralize the interest which the forex trader is making due to carry trade for the forex pair. Rate differentials are usually widening because the risk is creating problems for the borrowers in the countries. New forex traders should be cautious while considering carry trade since it is fairly risky. In 2019, there have frequent fluctuations in the commodity rates, and trade disputes between the US and China have adversely affected the yield for some of the currencies having higher interest rates. Also, uncertainty about the future has led to an increase in investment, the flow of funds to countries which have low or negative interest rates

The Best Long Term Forex Strategy

by Fxigor

How to trade long term forex strategy and How to Plan an Effective Long-Term Forex Trading Strategy in 2020?

In the world of forex, it would be essential to have different types of trading strategies for the short term. Along with it, long term planning is equally essential. With the forex trading strategy for the long run, you aim towards larger prospective profits with even little amount of capital investments. Also, these wouldn’t translate to premature stop losses, unlike trade approaches that are short term.

Making an efficient trading strategy for the long term

Recently we created article Forex Weekly Strategy.Traders need general advice about How to Plan an Effective Long-Term Forex Trading Strategy because trading rules are not only important things. Traders need to see bigger picture.

It’s better to have a clearer picture of what you would like to have from the forex market. The target has to break down the following.

Fundamental analysis and long term system and COT report

The term would refer to proper tracking of the progress of commanding economy heights while are known as fundamentals that would go along with the aforementioned idea. Fundamentals would be things such as interest rates, employment, CPI along with politics.

While trading in the big picture, you would have to know about fundamentals for the involved currencies. It’s much better not to avoid interest rates when trading a bigger picture. Upon holding currency trade for higher than a day, you’ll also notice a thing which is known as rollover. This depends on the involved currencies with the trade direction, you would also pay little interest or also earn interest as well. For the part, if a country pays the ideal amount of interest, the world traders purchase currency against weak currencies while forming trends.

For me, Interest rate, Industrial production, GDP and current high important news are the most important information that I check before any new long term trade. For example, if I want to trade EURUSD I need to know these important facts about the European Union and US economy. Daily chart and Fundamental analysis need to show the exact same direction of the trade before any trade execution.

I like every Tuesday to check the COT report. How to use the COT report in forex trading? In the COT report is most important to figure out Reversals Type One or Reversal Type Two and using knowledge from that to assume the next long term movement in the forex market.
What we can see in COT report :

Try to see Reversals Type One – When the spread between commercial traders and large investors is big, then we should expect a market reversal.

Reversal Type Two – When large traders start to reverse their positions (i.e. the large investor’s line’s trend starts reversing), we can expect a market reversal most of the times.

Weekly charts and price levels

In step 2, traders need to see the big picture using the weekly chart, to get the idea for Long Term Forex Strategy. On the weekly chart, the trader needs to analyze important levels, last month and last year high and low, close prices, important Fib. levels. Important price levels are trader’s edge, an important trigger for any trade.

So, if you’re not grasping on the happening on currency pairs, it is better to view all weekly chart details with a step back. This would stop you from making uneducated guesswork.

Larger weekly based charts make move on your daily chart appear trivial while providing you with a better feeling about the data you’re analyzing. With a step back you can minimize second-guessing.

With such items, you also make strong decisions for trading for supporting positions that you hold. You must never make trades just for making these. Also, you must easily be able to explain all of these to third parties upon having. If you follow the rule, it would help in avoiding boring trade. With real trading, especially larger picture trading, it gets slow and boring. A lot of traders get brought in and trade in a quick and leveraged way, and due to this there are a lot of failing forex traders.

Forex Trading Technical analysis for long term strategy

The technical analysis takes a lot of forms while you’re putting this into practice. If you’re saying technical analysis for a single trader, they would also think about moving averages, while another market operator would think of MACD while mentioning technical trading.

Except for price levels, technical analysis can show divergence, supply and demand areas, Pivot point areas, oscillators levels such as RSI levels, Stochastic levels, MACd, etc.

There are no perfect rules for trading orders which can tell you when to buy or sell the asset with high probability. Trading is like signature unique, and traders need to develop an original methodology for trading and for market understanding.

While forex trading strategy with a bigger picture, you look out for different technical aspects for supporting trade. So, if you’re concerned about purchasing a currency pair, it shouldn’t be technically overbought.

Am I true or wrong?

And true and wrong. Momentum traders can buy overbought assets very easy but the mean reversion trader will sell. Both can be on the right side.

Some technical analyses must be involved in supporting the decision. This helps with timing while helping to avoid getting within a bad time. Overall you would also get the right idea, but with technical analysis, in the future, you’re also able to reduce associated risks.

Trading with long term forex trading strategy is all about taking all essentials into account while coming towards an informed decision. This is one of the best available methods of forex trading that has been utilized by experts.

What is my Best Long Term Forex Strategy? I like when fundamental news and technical chart show the same. For example, the strong engulfing pattern on the daily chart or weekly chart with strong industrial production for rising currency for me is the best trading opportunity.

What Percentage of Traders Lose Money?

March 6, 2020 by Fxigor

Why Forex Traders Lose Money in Forex Industry

Percentage of traders that lose money is 95% based on research Contentworks and forex trading statistics. Some brokers have data information that 73%-85% of their clients do not lose money. It is true because there is always a big percentage of traders that are not profitable but are not losing traders as well. So, how many forex traders are profitable? In the retail industry around 5% and in prop companies around 80%.

In our article Can You Make Money Trading Forex? we explained problem with trader that lose money.

But what science says about retail traders?

In the article “Do individual currency traders make money” we can see that profitable traders exist in the currency market and daily traders as well. Risk-taking is problem number 1 for all retail traders (Uninformative Feedback and Risk Taking: Evidence from Retail Forex Trading )

Experts claim that 95% of the forex traders make losses due to which they quit forex trading. The DailyFX forex website found that though some forex traders are making a profit, new traders still find it difficult to be profitable. Some of the reasons why most Forex Traders Lose Money are discussed so that new forex traders can avoid making a loss.

Understanding the market

Many traders are making the mistake of thinking that they can beat the forex market and make a large profit with little capital. These traders may be very aggressive in trading, go against trends, and lose money. Instead, they should understand the market, and try to make money from well-defined trends.

Low capital

Usually, traders start forex trading to make quick money or get rid of debt. Forex marketers often encourage these traders to trade with high leverage and use larger sizes of lots to make larger returns, using small initial capital. In the short term, a forex trader may get the high returns he is looking for. However, since the risk is very high due to the higher leverage, and less capital, traders often become emotional, and time their trades at the worst possible time, making a loss. Hence forex traders should have at least $1000 before they start trading, else they are likely to make a loss.

Managing risk.

Like in life, risk management is important if a forex trader wishes to survive. Skilled traders can lose their capital if they do not manage risk. The trader should first focus on protecting his capital before trying to make a profit. Once the capital is depleted, the ability of the forex trader to make a profit will be reduced. A recommended risk management practice involves placing stop-loss orders after the forex trader has made a reasonable amount of profit. The lot sizes should be small compared to the capital in the account, and the trader should exit trades that are not viable.

Please read more about this table below in our article about trading risk and risk management:

Being greedy

Some forex traders want to make the maximum profit possible from every move in the market. Traders who wait for the last pip before the rate change reverses may hold their positions for too long and could lose the profitable trade. Hence the trader should be happy with a reasonable profit and not wait daily to maximize his profit. It is possible to make a profit trading forex daily, and so traders should not be very greedy

Trading indecisively

Traders often find that the trade they have chosen is not immediately profitable, so they close the trade, and reverse it, only to find that their market is moving in the opposite direction. The trader will regret his decision. It is important to choose a specific direction for a trade and be patient. Switching trades based on short term trends will result in depletion of the capital invested.

Predicting the top or bottom

Many new forex traders, try to predict the turning point for forex pairs, often going against the market trends. They may add more funds to the trade, and make a larger loss compared to what they predicted. Though it is not worth boasting about, it is safer to trade based on market trends. If traders wish to pick the bottom, they should choose the bottom of the uptrend. Similarly, if they wish to trade at a peak, they should trade when the market is moving up, not when it is moving down.

Refusing to accept mistakes

Though most people want to be right all the time, forex traders should accept that they made a mistake in the trade and continue to waste resources. This could deplete the balance in the forex account. It is always better to accept that the trade was a mistake, close it and look for the next opportunity to make a profit

Purchasing forex trading systems

There are many forex trading systems being advertised extensively online, which promise huge profits. Some traders make the mistake of investing money in these automated systems, and yet make losses. New forex traders should understand that there are no automated systems for making a profit trading in forex, each trader should develop his own method and strategy after spend time understanding the forex market…

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