Giving back profit: what's your tolerance?
Every trend trade gives back part of its profit before the exit — that's the cost of letting winners run. The question is how much give-back your plan tolerates and how you set that number.
What's yours?
- the give-back your exits allow (trail distance, % of peak)
- how you chose it
- the trade where the give-back felt unbearable
The ATR guide gives a volatility-based way to set the tolerance.
Background: Average true range (ATR): measuring volatility and setting stops
ATR shows how far a pair typically moves in a period. Here is how true range is calculated, and how traders use ATR to place stops and size positions.
How is ATR calculated?
True range for each period is the largest of high minus low, high minus the previous close, and low minus the previous close, ignoring signs. ATR averages true range, typically over 14 periods with Wilder's smoothing.
What ATR multiple should I use for a stop-loss?
Many traders use 1.5 to 2 times ATR, but there is no correct number. Wider stops are hit less often and need a smaller position to keep the same amount of money at risk.
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