This is a great way to work out your stop loss level. You can use this when there is nothing else to go by re: previous highs or lows.
Look at the ATR reading on a daily chart. The minimum you set your stop at is 1 x ATR on a daily chart pattern. The maximum is 2 x ATR on a daily chart. If you are trading a range on an hourly, 2 hourly or 4 hourly chart use 2 x ATR as your stop level.
This is a hard fast formula that if used in conjunction with your risk/reward ratio gives you an unbreakable way to work out your loss per trade equation.
If you are winning 1 out of 4 trades than you need to be winning 4 times what you are risking losing with your ATR formula. If your expected exit point is not 4 times the amount risked losing, don't enter the trade.
When your trade has moved into profit by 1 x ATR then move your stop to break even. When the price has moved to 2 x ATR into profit, then move your stop to 1 x ATR into profit and so on.
The key to profitable trading is to MINIMISE LOSSES. It's less about how much you are winning. You can be profitable by winning only 1 out of 5 trades. That means you need to be winning 5 x what your risking losing with your ATR formula.
This may not sound like much of a win rate but I have found that you are winning around 20% of the time and managing risk the other 80% of the time. Even though you may only win 1 full profit out of 5 trades, some of the other 4 you are ending at break even and not losing.
Get to break even ASAP. Remember the key is to MINIMISE LOSSES. Break even is OK so don't let the price get further than 1 x ATR into profit before moving to break even.
