Swing Trading: Using the Average True Range (ATR) for Stop Loss

When developing a swing trading strategy, we need to consider how to manage risk. One way is using the Average True Range (ATR).

The ATR is a standard measure of volatility, that can easily be viewed on charts. A cautious stop will be 100% of the ATR, in pips, above or below the 50 EMA.

More aggressive swing traders may use as little as 50% of ATR, and that’s fine. There’s really no right or wrong figure.

All that really matters is that you stick to the risk and reward ratios set out in your trading plan. For comparison, it’s worth noting that day traders frequently work with stops as tight as 10% ATR.

Additionally, we need to set out stops at odd dollar amounts to avoid institutional stop hunters. For our profit targets, we will look at the next significant level of support or resistance. We’ll aim to exit the trade just before that level is reached. Thus, we hope to avoid the risk of another swing point, turning the trade against us.

An alternative exit strategy is to wait for the first candle to close above or below the 50 EMA. This might be used as a signal that the move is over.

It’s up to each individual to decide what is an acceptable risk/reward ratio. But the important thing is to observe our own risk management rules at all times. If you’ve set a minimum of 1:2 in your trading plan, then don’t depart from it, no matter how enticing a set-up may look.

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