Shred the market: Gauge the waves with ATR

I wanted to take a few minutes to talk about the ATR indicator (average true range) that is sitting on the bottom of my charts. I just put them up the other day to answer a question from a reader and never took them down, but it is interesting to note that we are watching the ATR trading below 3, a random point that I have used in the past to help me judge the waters. I think of that 3 as the cutoff point between calm trending markets and non-trending markets. When was the last time we were below 3? Since the time span from the end of April to the highs in May, another amazing trending time.

The reason I brought the ATR out was because a trader a week or so ago complained about getting stopped out with a 2-point stop. It was during a time that I didn’t even think the market had moved 2 points. It did. It was just a really unfortunate entry. It happens to all of us. The problem was, and this is when we hate those safety nets, the trader was right and the market took off. That is when it hurts the most, when we find ourselves sitting at the starting gate with a loss and everyone else is “winner winner chicken dinner”. It hurts.

I have talked to many traders over the years about stops, and here is the dirty little secret: the wider the better. There is not an automated trader out there that doesn’t know that. There is so much noise in the market that Draghi flapping his lips in Germany can take you out of a good trade at any time.

You have to know about noise. You have to know about volatility. You have to know about range. It has to be part of your trade setup and management. We are in low volatility now. If you need to make the same amount of money out of this market as you did last week when the 60 minute ATR was above 4, you need to adjust. It is not the same market.

When traders say to me “I always use 2 point stops,” I hear “I always use a 9 iron.” That doesn’t make sense to me. I suppose it could work if you are adjusting someplace else. There are plenty of adjusting tricks. One of my favorite is moving time frames. If you find you trade well in an ATR environment of 4, then find a time frame that is giving you that and trade it, then you can keep your stops fixed. Maybe.

I don’t know anything about surfing except that it is best done in the ocean, and preferably a warm one. I live on the coast of Maine and our water temperature here is just hitting 70 for the first time this year, thanks to an unusually warm summer. Usually the water is cold, between 60 and 70. It is very different than Florida. That doesn’t stop dudes and dudettes from skinning up and waxing on. If you want to know what it is like surfing on our beach you can watch this video. It ain’t Hawaii 5-0 for sure. Surfers travel from Canada to hit these waves (what is going on up there? Life must be really boring).

Here is the thing about the ocean. It is different every day and in different places. Did you know there are different surfboards depending on the conditions? I have enclosed this handy little chart to help you pick your board. It has inspired me to make the same chart with ATR on the horizontal and market conditions, trending -> chop on the vertical and to put down my strategy in the different quadrants. One of those strategies BTW is stay out … you just are not good enough or rich enough to shred this market, watch the pros.

I have my homework cut out for me, if you have an adjusting chart like this, I would love to share it amongst the readers (I am looking to cheat).

Happy surfing(I will stick to the web kind).

The MiM is just showing us that Thursday’s close was blah… No strong readings in either direction so a bit non-directional moving back and forth across the great divide. Not even worth talking about the best or worst trading time frames since no one should have been making directional trades based on that. If you did and you are killing it, let me know. I know it is disappointing when we don’t get that strong MiM signal, but even having the above information, a do not trade the MiM signal (you of course can use your other tools freely) is invaluable for that closing hour.