A good risk management can positively impact the performance of a crypto assets portfolio. Using these mechanisms that limit losses can be a differential aspect that makes a trade profitable or not. When we structure our trades, it’s fundamental to establish a security net foreseen on our trade plan.
Applying a method that guides us in positioning stop orders is a differential. Stop ATR is an indicator that combines information about price movement and helps us in this task.
Stop ATR is calculated based on the amplitude of the price movement. That is, there is a big volatility influence in its formation. The central element is the True Range (TR). TR is nothing more than an amount (a piece) of price movement calculated between two intervals, being the largest number among the three (3) conditions below:
- The current maximum value minus the current minimum value;
- The absolute value of the following operation: current maximum minus the previous closing; and
- The absolute value of the following operation: current minimum minus the previous closing.
The image below exemplifies each of the three situations. The TR value is always positive.
Note that using just the amplitude of a bar wouldn’t be helpful, as it doesn’t accurately reflect recent movement, as well as it is not comprehensive enough to accommodate the occurrence of gaps.
TR solves these questions and provides us with a solid, structured base about the specific amount of price variations that a crypto asset has been presenting.
What does this mean in practice?
It means that, in a market that is more volatile and has more abrupt price changes, TR (as well as Stop ATR) will be greater, guiding us to position the stop with a greater security distance. This way, wrong exits caused by temporary oscillations can be avoided.
On the other hand, in a less volatile environment, TR will present smaller readings, allowing for us to place our security net a little closer. In short, it’s an element that monitors the market’s volatility and, through this mechanism, helps us to optimize our defense strategy.
Using Stop ATR
To insert the indicator in your platform, right-click the chart, click on “Add Indicator” and type “Stop ATR”.
Comprehending the concept of True Range makes it easier to use Stop ATR adequately. To plot the indicator, an attenuation of the TR values is carried out through a moving average, typically with 20 periods. Based on this value, the stop line is calculated for each position, as follows:
- In a bearish trend, with closing below the moving average, the stop will be positioned in a zone above the prices.
- In a bullish trend, with closing above the moving average, the stop will be positioned in a zone below the prices.
Stop ATR provides us with a concrete methodology for optimizing stop orders. Based on information from the market itself, this indicator seeks to structure an adequate distance to the safety net, taking recent volatility into account.
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