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ATR: Keep Expectations in Reality

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We have seen some very crazy moves in the currency markets. It does not take a genius to realize that volatility is up.

The ATR (average true range) has really increased in many of the popular currency pairs. This can be a major drawback especially for the inexperienced trader. They see these big sweeping moves and are rubbing their hands together thinking of “letting profits run” and taking the huge chunk of the move. With zero knowledge of the range a particular pair, traders are shocked when the move fizzles. Now, there are many reasons for this. Not to get too involved in this subject but it could be something as “simple” as a trader taking a long trade right into a resistance level. This article is going to focus on something a little easier.

One thing great about the London trading session is that it can be considered as the “start” of the trading day. This is generally where the big moves truly happen. By the time the U.S. session starts, it is very possible that the bulk of the average range has been completed. When this happens, several things can occur.

  1. Markets simply range for the remainder of the day
  2. Profit taking occurs or fading of the dominant trend of the day, occurs

Of course, nothing is written in stone. There is no reason, given the right ingredients, that the markets can exceed the average by a sizable amount.

Expectations. We all have them. Traders, as opposed to others, seem to have some absurd expectations. 100% returns. 100% wins. Retire in Bora Bora trading their $5k account. Hey, I am all for dreams because without them, life can be pretty drab. The problem is with trading, absurd expectations can lead to a blown out account.

To help keep your expectations in check during your trading day (this applies to trading week, month…), let’s give ourselves a rule: Check how far the currency pair has travelled by the time you get to your computer.

How do we do that?

21-period ATR applied to chart. Average range is observed (166 pips)

21-period ATR applied to chart. Average range is observed (166 pips)

So now I know that this pair averages 166 pips over the last 21 trading days. If you come into your trading day and your favorite pair has travelled a distance close to the average, would your expectation of a 80 pip move be realistic? Probably not. Do you hang up the charts? You could or you could do the same thing with another pair to see if the average range is close. Many times, you may find one pair is near the average and another has only travelled 40%.

For those that trade the “hub” of Forex activity, you certainly can use a percentage of the range for a target.

Is this flawless? Nothing in trading is. It is designed to keep your expectations in check…keep them real. From the many emails I have received from traders, keeping expectations rooted in reality is a problem. This certainly can help.

 

 

 

About Coach Shane

A Forex analyst, Shane got started in Forex mostly due to the low initial capital required, and diversifies with both day and swing trading. Shane lives in Toronto, Canada.

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