ATR method: how fast the market will reach TakeProfit, and is there any chance to reach it?
You’ve probably heard that cryptocurrency market is volatile. Some traders like it. But the bounce of rates, if the coin soars making investors happy or slides down making happy short lovers, they do not repeat oftener than we would like to see.
Mostly the market, at least top coins, are more or less stable. Stably bad, for example.
Not so long ago we’ve mentioned that in the long run, the only type of traders earns on trading: those who accept trading as a business, use strategy and follow their plan. In this case, it is important to plan everything: income, expenses, entry goals, exit, transaction volume, profit and risk ratio, etc. We showed an importance to ignore your emotions.
In the last post, we’ve figured out how to plan exit goals from the market. The terrible truth is that this is not enough: the most important thing for the plan is to be realistic. The catch is that the market is able to reach your goal but after 1.5 years, and you think that you are trading D1 or are ready to hold positions several days.
How to check the adequacy of your financial goals
ATR — Average True Range, a technical analysis indicator that shows how active was the price movement during a specific period. It demonstrates a number of units which the market overcomes within a single candlestick on a timeframe during a specified period. The indicator is suitable for stable pairs, whose prices are more or less predictable, although it is believed that it takes into consideration market volatility.
How does it work
Let’s suppose that we choose a pair of ETH / VIBE on a monthly timeframe. Take the ATR indicator with a 12 period:
Let’s say that ATR = 500
That means that over the past 12 candlesticks, the market within each single candlestick has passed 500 units distance.
In order to find an indicator we will take the ranges where the market was fluctuating while each candlestick was formed, and it will give the average value of the market movement within each candlestick.
How to interpret the ATR value
12 is a 12 months in a year
If the average value of one candlestick equals 500 in a month, then opening a position with a goal at a distance of 500, according to statistics, you won’t reach it earlier than in a month. At least, if nothing goes wrong in the market.
Do not rely on an accurate forecast. This is a general conception: is this goal adequate according to the current market conditions.
Let’s suppose you open a position on the daily timeframe, you see a signal to increase, and the closest goals that the market may reach:
As you remember, goals are formed by support and resistance levels. In our example, it is the resistance line that shows where the price can go.
The main thing is to determine the goal before opening a transaction, the mark where it is worth holding the position. In other words, before you enter, you need to determine the exit point from the market with a profit. This is important, even if you do not plan to put Take Profit, in the last blogpost we’ve discussed it in detail.
According to the schedule, the market has reached the beginning of a new trend: for a long time the market was sliding down. Then the price finally reached the bottom, and bounced off it, it pierced the resistance level. An entry point was formed, it is interesting if the movement continues. In this situation, it is normal to choose the target, and the second, and the third marks.
Goal number 3: the goal of a larger timeframe, therefore, highlighted in red.
Let us see adequacy of each goal taking into consideration the average market movements in the past.
Just look at the value of the ATR indicator on a monthly timeframe for a certain period. The period does not have to be equal to twelve. We analyze a concept of the indicator, and determine goals of the opened position.
Let’s suppose that between the entry point and:
- Goal №1–250 units,
- Goal №2–500 units,
- Goal №3–750 units.
What do we have:
Do you remember the original ATR value?
It equaled 500, on average the market passes 500 units per month.
So, it is logical to assume that:
Goal №1 — approximately you will reach within a month *,
Goal №2 — in a month,
Goal №3 — hardly earlier than 1,5–2 months.
* If the market continues to move with the same dynamics. Naturally, the market can reach the levels faster, slower or does not reach it at all.
The ATR indicator is needed to make a conclusion about the adequacy of the goal based on statistics.
ATR is an additional way to define the basis which you use to set exit goals: desires, emotions or logic, facts.
What is the catch: tactics and accuracy
As you remember, resistance and support levels are price zones. It is a range, not a mark. Therefore, even with a correctly defined goal, and checking its adequacy, you risk:
- set the goal further a few units, and won’t reach it,
- set a goal closer, and exit too early.
What shall you do?
Let’s suppose you see a buy signal at $101, the resistance level pierces the zone from $105 to $106. Where should you set a goal? Where does that golden edge of an exit from the market hide strictly on time?
We remember about the second property of the levels: the price will bounce rather than pierce the line:
As a rule, the market begins to move according to countertrend just below the level. Therefore, we take into consideration a small price gap: we plan to exit below $105.
We’ll find the average distance
What do you see here:
- Daily timeframe;
- ATR indicator for 15 minute timeframe,
- The period of the ATR 96, we’ve mentioned above, that the periods may differ, in this article we analyse the logic,
- The ATR value is approximately 10 units (not visible in the picture, the indicator has showed this value).
We count 10 units from the lower limit of the resistance level on the daily timeframe, and at this point let’s put Take Profit:
If you need to find an exit point on a shorter timeframe, find ATR on shorter timeframes, not M15, but M5.
What have we learned:
- ATR shows the average value of how much does the market passes within each individual candlestick on the timeframe you need.
- ATR is a way to make goal setting more objective. In addition to the exit points of most traders, you are guided by the previous market movement.
- ATR is something like common sense in financial markets. There is no task to guess the point where the market may reach the desired mark. The task is to estimate adequacy of your goal, and see how fast it can be achieved if the market moves in the same way as it was moving.
- ATR gives an idea of how much time does the market need to reach the goal. So, worry not.
- ATR is good in order to learn more about coins. Look at the ATR statistics if you start trading a new coin, and you do not know the ranges which the market passes within each month.
- The method of checking goals with a help of ATR is also needed to create your own trading strategy.
- The shorter your timeframe, the shorter your timeframe you need to select for ATR. ATR is a universal method, it works on different timeframes, coins, etc.
Remember that there is no magic pill, guarantee or wonders, you should use the tools, and collect your own stats.
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Originally published at support.3commas.io.