Trading using ATR for entries on forex and futures allows traders to enter trades at the lowest point of risk. While some trading strategies use a breakout system, this methodology exposes the trader to high risk entries. However, when trading using ATR for entries the traders decrease their risk.
Trading Using ATR for Entries Criteria
When trading using ATR for entries, the trader must understand how the ATR works. It measures the movement of the market per period from high to low over a specified number of bars. The end result is that the ATR can actually calculate the areas that will support or resist price movemnts in the opposite direction. This makes the ATR indicator very powerful as an entry tool for lowering risk and increasing risk to reward.
For example, on the Crude Weekly chart below, there are two entries. The first white line at $56.60 on a breakout which also turns the ATR stop to red. Using this entry, the trader would need to place the stop above the last high at $59.21 (first red line), risking $12.61 per contract or $1,261. The second white line shows trading using ATR for entries. The entry is generated as price approaches the ATR at $52.66 and a stop at $54.66 could be implemented ($2 offset, second red line).
Using the current price at $36.67 as an exit, you may think the first entry generated higher returns. Actually the second entry returns a higher return on investment.
- First trade generates a $1,992 profit but only has a risk to reward of 1 to 1.57
- Second trade generates a $1,598 profit and has a risk to reward of 1 to 7.99
Trading using ATR for entries allows traders to significantly increase their risk to reward ratio. This is extremely important because all traders, regardless of experience and knowledge, will go through periods of drawdowns. Increasing the risk to reward ratio enables traders to stay in the green when the losers occurs.