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Chapter 35, Part III. Stop-Loss Orders Based on Volatility. Page 5

Discussion in 'Complete Trading Education- Forex Military School' started by Sive Morten, Dec 28, 2013.

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  1. Sive Morten

    Sive Morten Special Consultant to the FPA

    Aug 28, 2009
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    Commander in Pips: There is one last indicator that could be used, but it has a lot of limitations - ATR – Average True Range. Its limitation links with the fact that it estimates average daily range for recent N periods. So, this range could be applicable only for 1 single trading day following after the current day. Here is an example:

    Chart #4 | EUR/USD Daily and ATR (21)

    You can see that at the moment of entry ATR tells us that the average daily range for past 21 periods is about 200 pips. So, it is unlikely that on the next day market will move more than 200 pips as to the upside as to the downside from previous close price – that has happened. But on the next day the lower border easily was broken. The reason is that this range should be counted from the most recent close bar, but not extended in the future as with Historical Volatility. ATR is very useful with different application that we’ve discussed in Charter 20. But it is not very suitable for placing stop order.

    Maybe those who trade intraday will find them useful, since they will get daily range by ATR value. If the market will approach upper border – they could try to sell, lower border – to buy.

    Well, personally I like Detrended oscillator and Historical volatility most of all.

    Commander in Pips: That is my choice also.

    P.S. This lesson was written by Sive Morten, who has been working for a large European Bank since April of 2000, and is currently a supervisor of the bank's risk assessment department. Sive's knowledge of forex market and banking industry is vast and quite complete. If you have any specific questions about forex, banking industry, or any other financial instruments, please post them them on the next page an Sive should answer soon.

    Note: FPA ranks are earned in the battles against scam, not in the classroom.
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