I am writing this post to organize my thoughts on ATR and Volatility.
I have noticed that there are three different phases of Volatility.
Low
Medium
High
Using the 1 period ATR on the Daily chart, the high to low movement indicates what kind of Volatility one can expect.
Low Volatility is when, on average, the daily high to low is around 300 ticks +/-
300 ticks is just a number. What I am looking for is the percentage. Low Volatility seems to be when the high/low movement of the day is around 0.50%-0.70% of the price of Dow Jones.
Example:
If Dow Jones is at 85,000, then 0.60% would be 510. Therefore, a low volatility day within this price range would be 510 ticks on average.
Because Dow Jones is at on average 44,000 then a low volatility day using 0.60% would be 265 ticks. This is in line with 300 ticks on average.
On the 15-minute time frame, using the 14 period ATR, I try to line up the peaks of the ATR values. In this case, it lines up to around 50 ticks.
This information is vital in knowing how big stop losses and targets should be. If a low volatility day is around 300 ticks, then does it make sense to go for 300 tick moves? Depending on your risk to reward preferences, you can use ATR in a myriad of ways.
I personally use 1.25 times the 15-minute peak ATR as this is my entry time frame. The peaks are on average 50 ticks. This would give me an ATR stop loss of 62.50. I would round it up to 65 ticks.
If I was to take this hypothetical trade, I would use the 65 ticks stop and using 2.5 risk to reward, I would use 165 tick targets.
If one would like to go for a 1 to 1, then they can use twice the peak ATR of 50 ( 100 ticks ) and go for 100 tick targets.
Medium Volatility is around 580-600 ticks on the daily chart, or 1.25% from high to low.
On the 15-minute chart, this would be 90 ticks using the peaks of the 14 period ATR.
Using 1.25 times the ATR, I would arrive at 115 ticks for stop loss and using 2.5 risk to reward, I would target 290 ticks. This would give the trade room to play out.
High Volatility is around 850 ticks and above. On the 15-minute chart, High volatility is 135 ticks. Using my same 1.25 time ATR, the stop loss would be 170 ticks and the target 425 ticks, using 2.5 risk to reward.
If I were to take this hypothetical trade, and even having a not-so-great entry, using a 170 tick stop loss would allow me to take some heat on the trade but still stay in. Going for 2.5R, I would target 425 ticks.
Taking this other hypothetical trade, one could still be in the trade and achieve the profit goal without getting pinged out by wicks.
This allows a trader to not have the pressures of being so pinpoint accurate on their entries and to allow a trade to play out without getting pinged off the trade. We are not brain surgeons and therefore, do not need to be highly accurate and precise. You can be an average trader with good technical skills and still achieve success.
Using the ATR indicator is an art form and is not rigid in its application. You have to use judgement calls when reading the numbers. It is not a fool proof indicator and sometimes you will under or overcompensate what number to use.
I hope this post was helpful for anybody and feel free to leave comments down below on your thoughts. Thank you.
I have noticed that there are three different phases of Volatility.
Low
Medium
High
Using the 1 period ATR on the Daily chart, the high to low movement indicates what kind of Volatility one can expect.
Low Volatility is when, on average, the daily high to low is around 300 ticks +/-
300 ticks is just a number. What I am looking for is the percentage. Low Volatility seems to be when the high/low movement of the day is around 0.50%-0.70% of the price of Dow Jones.
Example:
If Dow Jones is at 85,000, then 0.60% would be 510. Therefore, a low volatility day within this price range would be 510 ticks on average.
Because Dow Jones is at on average 44,000 then a low volatility day using 0.60% would be 265 ticks. This is in line with 300 ticks on average.
On the 15-minute time frame, using the 14 period ATR, I try to line up the peaks of the ATR values. In this case, it lines up to around 50 ticks.
This information is vital in knowing how big stop losses and targets should be. If a low volatility day is around 300 ticks, then does it make sense to go for 300 tick moves? Depending on your risk to reward preferences, you can use ATR in a myriad of ways.
I personally use 1.25 times the 15-minute peak ATR as this is my entry time frame. The peaks are on average 50 ticks. This would give me an ATR stop loss of 62.50. I would round it up to 65 ticks.
If I was to take this hypothetical trade, I would use the 65 ticks stop and using 2.5 risk to reward, I would use 165 tick targets.
If one would like to go for a 1 to 1, then they can use twice the peak ATR of 50 ( 100 ticks ) and go for 100 tick targets.
Medium Volatility is around 580-600 ticks on the daily chart, or 1.25% from high to low.
On the 15-minute chart, this would be 90 ticks using the peaks of the 14 period ATR.
Using 1.25 times the ATR, I would arrive at 115 ticks for stop loss and using 2.5 risk to reward, I would target 290 ticks. This would give the trade room to play out.
High Volatility is around 850 ticks and above. On the 15-minute chart, High volatility is 135 ticks. Using my same 1.25 time ATR, the stop loss would be 170 ticks and the target 425 ticks, using 2.5 risk to reward.
If I were to take this hypothetical trade, and even having a not-so-great entry, using a 170 tick stop loss would allow me to take some heat on the trade but still stay in. Going for 2.5R, I would target 425 ticks.
Taking this other hypothetical trade, one could still be in the trade and achieve the profit goal without getting pinged out by wicks.
This allows a trader to not have the pressures of being so pinpoint accurate on their entries and to allow a trade to play out without getting pinged off the trade. We are not brain surgeons and therefore, do not need to be highly accurate and precise. You can be an average trader with good technical skills and still achieve success.
Using the ATR indicator is an art form and is not rigid in its application. You have to use judgement calls when reading the numbers. It is not a fool proof indicator and sometimes you will under or overcompensate what number to use.
I hope this post was helpful for anybody and feel free to leave comments down below on your thoughts. Thank you.
Note
Note
As you can see this week's price action, the daily high to low has been between 1.75%-2.5%700-1000 ticks Daily range. This is high volatility. The ATR on the 15 minute is hovering around 135 ticks.
I have to use a 175 tick stop to compensate.
Disclaimer
The information and publications are not meant to be, and do not constitute, financial, investment, trading, or other types of advice or recommendations supplied or endorsed by TradingView. Read more in the Terms of Use.
Disclaimer
The information and publications are not meant to be, and do not constitute, financial, investment, trading, or other types of advice or recommendations supplied or endorsed by TradingView. Read more in the Terms of Use.