The average true range stop is the cornerstone of the TradersHelpDesk indicators and methodology as it provides a very low risk entry point. However, as traders, the “conversation” in our heads often prevent us from entering out of fear of being stopped out.
I was having a conversation with a good friend the other day and told me “You know what they say” then he went on to tell me “What they say”. I then asked him the question “Who exactly are they?” He sheepishly and honestly answered me “Well, you know THEY are the voices in my head”. Now we all chuckle at this response but in reality we all understand to varying degrees what my friend was saying. Now, he was not hearing audible voices. However, he was honestly responding to how we all make decisions and take actions based on our internal thoughts and feelings.
All of us have done things that seem irrational and wonder why in the world would we do and or respond in such a way. These actions are in response to inward thoughts ideas and feelings. We, as traders, are ever in this internal war. Have you ever set down to trade and felt like dog gone it, I gotta get a trade cause I have a bunch of stuff to do so I can only give this a few hours till I must move on to another task.
And then you take a horrible trade or you take a good trade and hang onto the position too long under the guise of maximizing profits when the market was clearly telling you to take the money and run or take your loss before it gets even bigger.
Gail spends a lot of time working us through such emotions and feelings that hijack our good rational in trading. THD has developed flow charts to help identify the entries, exits, and stops, spreadsheets that allow you to record the trades, and numerous alerts both visual and audible.
Average True Range Stop – All Aboard!
So in the spirit of overcoming these emotions and thoughts that cloud our rational trading mind I want to take a moment to point out a very simple yet profound THD cornerstone ….support and resistance.
As I watched the markets last week the THD ATR just kept showing off its ability to show major areas of support and resistance. Take this chart for example at the blue arrow price came down to within 5 ticks of the ATR and bounced up.
Keep in mind this is a 720 minute chart. Over the years I have observed this time and time again on all time frames and many markets. So, you ask why is this important?
Well THD trading plans only enter at Average True Range Stop (ATR) and Congestion Zones (CZ)….ONLY!!!
Let me ask you a question — if you wanted to get onto a train would you go and expect the train to stop at any random place along its path or would you want to increase your odds of gaining access to the train. Jumping into a position in the market is like standing out in the boondocks expecting the train to let you on. I would suggest if you want on that train you should go to the places the train normally would stop…..like a train station or a city or somewhere the odds of that train stopping for you is higher.
The Average True Range Stop acts like a potential train station for the markets — a place that has greater odds of being a place you can get on. Many times and for many reasons I have jumped on the train out in the boondocks and got my financial legs cut off… not pleasant. Then only to see price follow through on what I expected, however the pain to hang on to the train at my entry point was just too painful to endure so I would let go. If only I had waited, been patient and entered my position at Average True Range Stop or CZ (the train station where we expect the market to slow down and let us on) my life would have been much less painful and much more profitable!