How to Place Stop Loss using ATR

Hi, welcome to this new video on how to place stop loss using atr. Before starting as usual, remember that this is just for educational purpose. So every security that I mentioned here is not a suggestion to buy or sell. Okay? Now when you do trading, one of the most important thing is to place stop loss, right? So is the level where if the market is going against you, you will close your position, you will sell if you are long and you may be wondering, okay, how should I place my stop loss? One idea could be to use a fixed percentage of the price to decide where to place it. For example, you may say let's put the stop loss 3% below my entry price or something like that. But I will show you now that this is not really a good idea. Consider for example these two stocks. One is at and the other one is BG and E. Okay? They are trading a similar price. One is under 80, one is under 98. Right? Now suppose your trading strategy is to enter above the high. And you see here, the high is 182.29. Okay? And you want to place your stop loss maybe 3% below the low. So the low is 179.15. And 3% of 180 is what, 5.4. So what we have is. Let me show this with the pen. So we want to enter here, okay? And we want to put our stop loss 5.4 below this, okay? And again, this is 179.15 minus 5.4. Let's say is around 173.5. Okay, let's say 174. Okay, so around here, so it's pretty far. Okay, Let's say is around here. So it seems in this case 3% is quite far. But what happens if we do the same thing here? Okay, let me erase this now. If we do the same thing here, we are trading around 200, okay? And 3% of 200 is 6. We want to enter here and we want to place a stop loss $6 below the low. And the low you can see here is 198. So it means now the stop loss should be at 192. That is actually here. Okay, so 192 around here, right? What's the problem? As you can see this time actually it's here, but it's fine. This time the stop loss is much closer. In the previous case it was around around here, right? So very far from the price. But in this case is around here, so very close. What's the problem? Well, the problem you may have realized already is that this guy is moving much more than this guy, even though the trading price is similar. So how can we fix that? How can we find a way to determine our stop loss that is more systematic and is also taking into account how much the price is moving? Well, to do that we can use the average true range or atr. Now what is the atr? Let me show you. Okay, first I have to tell you what is the tr, so the true range. Okay, so the TR is the maximum of three things. Okay? One is the current high minus current low. Okay. The second one is the absolute value of the current high minus the previous clause. To say previous clause, I do I use this notation, the close of one candle before and the third one is the absolute value. Absolute value means if you get a negative number, you just take the positive of the current low minus the close of the previous candle. This is the true range and the average true range. Okay? So this is the average true range is just the moving average of the true range. And if you don't know what is a moving average, you can watch my previous video on that. In that case it was applied to price. But you can also apply the same concept on other things like the true range. Usually the default is to use a 14 periods. Moving average. Okay? So the true range first is the maximum between these three things. And this is basically a way to consider how much the price is moving. And the ATR is the moving average of this true range, usually by default 14 periods. Okay? Now the nice thing is that you don't have to really compute this because we can many charting software now, they already compute the atr. So let me show you how we can see the ATR here. Well, we can go here to indicators and you can find it here. And now you see it below at the same time. Here we can do the same average true range. Fine. Now you can immediately see that this value that you can see here, the average true range at this Last candle is 9.05. But here is only 2.08. In other words, it means that if we want to place our stop loss here, we should place it closer in terms of dollars and here it should be farther. Okay, now let's change the rule we had before we say, let's place. Before we say we place the stop loss 3% below the low. Now let's see what happens if we place it 1 ATR below the low. Now 1 ATR here is 2.08 and the low is 179.15, right? So it's around 177. Now that means we place our stop loss around here. Now it makes more sense. You remember before how far it was? It was 174. It was something around here probably right? Now it makes more sense to have a position like that. Entry and stop loss, right? Let's see what happens in the other chart. Now in the other chart we should place it $9 below. Now this guy is closing at the low is 198. So 9 is around 189. And 189 is around here. Okay, so let's just show is around here. So again we can enter here and we can place the stop loss here. So you see that now it seems similar, right? It seems that this position of the stop loss is actually scaling well according to the volatility. Whereas before when we used the fixed percentage, it was not so nice because we had a very big position here, a very stop loss very far here. But here it was too close. So this is one of the way we can use ATR to place stop loss. Now here I show that you can take the last value of the atr. If you want to be more conservative, maybe you can take like the middle value of the last three months, six months. But it really, really depends on your strategy if it's more long term or short term. But the important thing is that already by using ATR instead of a fixed percentage, we are considering the volatility and so we can have a stop loss that is more meaningful. And this is just the theory. But how can we actually place a stop loss when we want to enter? Well, this really depends on the strategy. For example, when we do trend following, one of the things you can do is you can place your stop loss below the low of the candle that is touching a moving average, right? So let's for example plot here the. I don't know, let's plot a moving average. For example, Let's say the exponential moving average, Maybe, let's see if 20, Let's say the 20 moving average. Okay, I'm not saying that this is a good strategy just for giving you an example. So let's say that your strategy is to enter when you see the dip on this moving average, for example, here, right? Now if you look here, what is the atr? You can see here the number, right? So we enter here and the ATR is 6.3. So our strategy will be to place the, to place the stop loss one ATR below the low here. So the low is 165. Well, let's say we enter here, okay? 165 minus 6 point. Well actually now it's 6.38, 6.4. Let's say, okay, and we get one. Let's simplify. We get like 159. Slightly less than 159. Okay, So let's say we are around here, okay, Let's say we are below 159. So probably around here is our stop loss. Now you see what happens when later we enter here and then the price is going down and we have this low. So this low is above the stop loss. You see, actually the low here is under 60.5 and we are below under 59. And what we can do after that is we can trail the stop loss. And I like to trail one ATR below the swing lows. This means that we can identify the next low that are higher. So for example, if we are here, the next low can be this one, this one, this one, you see, and actually this level. And every time there is this new swing low, we can place our stop loss one ATR below the low, right? So this is one atr. One atr. One ATR is always one atr. Okay? And this is one of the way you can trail your stop loss using atr. So again, stop loss can be used to enter. It can be used for trailing. It can also be used if you have a breakout kind of situation. So this was the trend following. Let's see what happens if we have a breakout. For example, let's see, X e. Okay, consider this example. Now we are here and let's say that your strategy here is, you know, you have identified this kind of level, you see is hitting that level three times. 1, 2, 3. And then there is a breakout. So one of the strategy you may use is when you have a candle that is above and you want to enter here, you can place your stop loss 1 ATR below the previous resistance. That now is a support. So this was around $69. Okay? And at this time the ATR was 1.45. Okay, let's say 1.5. So what do you do? You say, okay, I enter here. Actually sorry, is 1.65. You enter here above the high and then your stop loss can be placed at 69 minus 1.65. Okay, so is 67.35. So around here, okay, so what you do, you enter here, You enter here and then your stop loss is here. And this was your resistance and now it's support Right, so this is the entry and this is the stop loss. Another thing that I want to show you here that's quite interesting is another way to use the stop loss. Sometimes you. Sorry, the atr, sometimes you have these situations where the price start to go up, up, up, up, up. And you don't really see, as in the previous case, these swing low that are going up. Right. It's not making new low, it's just going up. Since we don't see any new swing low and the price is really extended. Another thing I like to do when I find this situation is to start to trail my stop loss below the next low. In other words, let's say that here I am quite far. I start to place my stop loss one ATR below the low and then one ATR below the next low and one ATR below the next low and so on. And I stop when I see new low. Right. Sorry. When I see lower low. So at the end what I do is I keep raising my stop loss eventually here you see here I place it one ATR below and then when I see this new low, I don't change my stop loss. I only change when I see a higher low. So in this case, what was the ATR? Well here the ATR was 1.45, right. And the low was 73.2. So is 71 point around 0.8. That is around here. So again our stop loss would have been around here. And these set of candles with lower low will not have triggered our stop loss loss. Okay, so basically today we have seen different types of way to use the atr. ATR is better than using a percentage of the price to decide our stop loss. We can use the ATR to place our stop loss below the low when we enter. If we have a deep on uptrend setup. For example, in the case before with the moving average, we can place the stop loss 1 ATR below the low touching the moving average and we can raise it at the next low, the next swing low that are touching the moving average. If the price is overextended and is not making swing low, we can trail one ATR below the next low and stop. Of course when the lows are going down and if we have a breakout like in this case, we can place our stop loss 1 ATR below the X resistance. That now is support. So I hope that this video was useful because I believe that where to place a stop loss is one of the most important thing that we need to know if we do trading, if you like this video as usual. You can put a like and you can subscribe to this channel so you will know when I upload new video. Thank you for watching and see you next time.