Hi All,
Currently I am using the following SL and Target for swing trade...max 15 days
Stop Loss: 1.5 X ATR
Target: 3 X ATR
Ration: 1:2
Is this approach correct,
Seniors please help us in providing an effective approach for Stop Loss, Target and Entry Price.
Seniors please pitch in.
Expecting a reply from ever helping AW10
tvrssvk , There are as many approaches to setting stop/target as people can think of. There is no single right or wrong answer.
In reality, yr stops and targets should come from your trading system rules. For eg - if you have a system that is to trade a rangebound market by buy near support
and sell near stop.. then quite possible this system will never give u 3 ATR trade. Or may be your trade entry/exits are based on lagging indicator which can not catch 3 ATR of move.
But if you have trend following system, then you might be able to get 3 ATR target.. provided your rules of trailing stop loss lets u remain in the trade for longer time.
That is where backtesting helps and I always stress on that.. i.e. you can see the performance pattern of your trade and finetune your target and stoploss exits.
So analyse your trading system and decide the ATR multiplier. Do not pickup the multiplier numbers randomly.
While using ATR, it is important to understand the what ATR is ? To me, it gives the typical size of a next 1 bar. It uses last few days to lookback and uses the price fluctuation of those many bars
and gets us the average. So if you are trading daily chart, then 1 ATR will give u approximate, most likely range of tomorrow's bar. From that perspective 1.5 of tomorrows action is reasonable to define as range for tomorrow. As ATR uses High/Low extreme in calculation, my suggestion will be to use those extreme of the bar on which u enter and add/deduce 1.5 ATR to set SLoss.
i.e. if u enter today in nifty, then the stop for tomorrow will be today's Low - 1.5 ATR. Otherwise, if you are unlucky to enter at today's top and set 1.5 ATR as SL from your entry, then you will hardly have 0.5 ATR left to absorb tomorrow's price action.. cause 1 ATR is already used by today's action.
If that seems to be big number and you can't handle such a wide stop comfortably, then use Rs. based stop loss limit.. Say 5k Rs. stop, i.e. on NF = 100 points.
Personally, I prefer to use Price action based points (pivot high/pivot low) as stoploss / target.. and then see a) if trade is passing my acceptance criteria (i.e. it needs to give me Reward/Risk potential of atleast 1.75 :1 to 2:1) and b) the Rs. risk is within my acceptable limit. If not then skip it and wait for next trade.
To keep it simple - If you don't want to backtesting record but have done some actual trades (say 40 or 50 trades) .. then .. take average loss and average profit of those trades in Rs. terms.
And see it fits your 2:1 criteria or not.. You can also look at Average Profit/Loss in point terms and see if that fits in terms of 1.5 ATR, or 3 ATR criteria or not.
Then you will get the answer yourself..
Hope this gives you few pointers to define your stops/targets ..
Happy Trading.
