|
While support, resistance, and Fibonacci are used as both entry and exit triggers, average true range (ATR) tends to be a one-trick pony. Once you have entered a trade, you are able to use ATR as a stop-loss indicator or as a way to place your protective short or long. ATR is a volatility indicator that smooths out gaps and erratic market behavior to give us the absolute highs and lows of the market. Knowing this range is very important. Under money management strategies, knowing the ATR gives you a clear example of the worst-case scenario. You are capable using ATR in one of two ways. The first way is to simply use it as a stop-loss or protective price indicator. In the chart we use a multiplier of 1~HF times the current volatility to create a loss target of 21 cents; price is 641~TQF. If you were to enter the trade in the chart based on the current trend, you would be buying in at the absolute high. Using an ATR stop loss lets you get out of the market based on volatility, not on a random decision. The common use of the ATR multiplier is 1~HF times, but in fast moving markets or in times of high volatility compared to the past activity, plus your money management thresholds, you can use ~HF times ATR. In slower-moving markets or during times of lower volatility relative to a market’s past operational history, you can use 2 times ATR. A second way to use ATR is as an indicator of whether a trade you are in has exhausted itself. If the volatility has suddenly decreased after a long rally down or up, it may be time to exit the trade immediately. Moving Average The first tool that I learned to use when I got involved with futures trading was the moving average. There were several rules about the 9-day crossing the 20-day, I also learned about the 8- and the 14-day MAs. It was all very exciting stuff. When it came to trading it, I found it difficult. We are all aware of the fact that technical analysis indicators are lagging, but when it came to waiting for the 9-day to cross the 20-day or the 8-day to cross the 14–day, I found that the price had moved in the new direction already and was actually in the process of rebounding. I don’t believe that the markets can divined with 100% accuracy, but I would like to know what is going on right now. I don’t want to be blindsided by MAs that are incongruous with the price activity I see on the screen. That’s when it occurred to me, MAs are a function of price. The MAs are designed to smooth out the price patterns over a set period of time and give us an idea of what the optimal price could have been had there been complete equilibrium between the buyers and sellers. This leads us to the next revelation: If the MAs represent the smoothing effect of the market, then the true deviation of MAs comes from the actual price breaking through or bouncing off of the moving average, not the activity of MAs crossing or interacting with other MAs. Price is king. MAs serve the price when it comes to setting a standard and representing deviation, not the other way around. When I trade I use the 9-day exponential moving average (EMA), the 20-day MA that is built into the Bollinger bands, and the 50-day MA. When the market “price” penetrates any one of these levels for 2 or more days, it can represent an entry signal or an exit signal. Failure to penetrate can represent a renewed buy signal or sell signal, depending on where the price is in relationship to the MA. The gold market is quickly approaching the 50-day MA at the $653.70 price point. The momentum is definitely up, but there is no way to tell if the market will make the leap or if this is a temporary retracement. The $653.70 becomes our key entry price when entering the market. On March 27, 2006, had we waited to enter the market at the crossover, we would have caught a rally from $575 to $750. So by waiting for the price to cross over, we have an opportunity to catch a new rally. However, the market could also collapse and the failure to penetrate $653.70 will be a setup for a short. The key to successfully trading the MA is to pay attention to how the price interacts with it and how it sets it up. Using the MA numbers as entry/exit and profit target setups puts you in control, as opposed to being a passive observer.
Related Articles -
average true range, ma, bollinger bands, atr, moving average,
|
