It is a reasonable question but there are some subtleties to it. First, until one has watched the market for a bit, understanding the difference between an 80% trade and a 70% trade is an issue. That isn't one's profitability, but the probability of a trade.
Additionally one has to understand the normal volatility of the market. Using news releases and the abnormal size of the bars, that is an indicator not to trade. News doesn't necessarily show directional bias, and oftentimes simply high volatility. Not the same thing!
So ATR can show the volatility of the market, and one should understand what normal volatility over the last period of time is (days and weeks). If prices often move 6 ticks after a good entry bar, you'll begin to note these things. The stop also is wider too.
Case 1. ATR generally is 12 ticks over the last 10 days or so. If ATR21 hits 25 ticks, that tells you not to trade. That is an abnormal market. The volatility is extreme. The stops are very far away. Some may trade by cutting size significantly.
Case 2. ATR generally is 12 ticks. That means on average your stop loss is a 14 tick loss. If you go for 4 ticks, you need roughly 14/18=78% to break even. If you go for 6 ticks, and the average bar size is 12 -> 12/18 -> 66% which relates to the initial settings over a decade ago of 4 ticks profit, 8 ticks loss. 8/12 -> 66%. The numbers adjust based on average market volatility increase
.
Some may go for 8 ticks.
Hopefully helpful and good trades to you!
It is a reasonable question but there are some subtleties to it. First, until one has watched the market for a bit, understanding the difference between an 80% trade and a 70% trade is an issue. That isn't one's profitability, but the probability of a trade.
Additionally one has to understand the normal volatility of the market. Using news releases and the abnormal size of the bars, that is an indicator not to trade. News doesn't necessarily show directional bias, and oftentimes simply high volatility. Not the same thing!
So ATR can show the volatility of the market, and one should understand what normal volatility over the last period of time is (days and weeks). If prices often move 6 ticks after a good entry bar, you'll begin to note these things. The stop also is wider too.
Case 1. ATR generally is 12 ticks over the last 10 days or so. If ATR21 hits 25 ticks, that tells you not to trade. That is an abnormal market. The volatility is extreme. The stops are very far away. Some may trade by cutting size significantly.
Case 2. ATR generally is 12 ticks. That means on average your stop loss is a 14 tick loss. If you go for 4 ticks, you need roughly 14/18=78% to break even. If you go for 6 ticks, and the average bar size is 12 -> 12/18 -> 66% which relates to the initial settings over a decade ago of 4 ticks profit, 8 ticks loss. 8/12 -> 66%. The numbers adjust based on average market volatility increase :).
Some may go for 8 ticks.
Hopefully helpful and good trades to you!
