Saturday, June 25, 2011

Trading Grains (Part 4): Managing Risk with ATR

To close out the mini-series of Trading Grain Futures I want to focus a bit on managing risk and how to maximize profit targets. When it comes down to it if you're not managing the risk on a trade you will not be around very long. When trading, my goal right off the bat is to know where I'm getting out in case I am wrong. I obviously take a trade because it shows me a high probability of making money but my focus is always the risk involved.Your job as a trader should be to always manage the risk to an acceptable amount related to your tolerance and account size. The winners then take care of themselves. 

So after discussing some of the ways I trade and analyze corn and the other grains futures in Parts 1-3 of Trading the Grains lets finish out this series with how I use the ATR to manage risk. The ATR is the average true range and I like to watch it on a number of markets and stocks to see how far a move can go. The ATR is a dynamic way to measure volatility in a constantly changing market.

I always use hard stops in the futures markets and usually get into a corn day trade with a fixed stop of 10 ticks or 2.5 points. I try to get into day trades with very precise entry points but still like to give my trades some room to wiggle and develop. Sometimes the volatility is so high you need to have wider stops and targets so how do I quickly decide on this in a fast moving market?

The ATR. I watch the 60 minute chart of corn as pictured below and here was today's action. The ATR was 5.22 which means the average price range of the last 14 candles was 5.22 points. This usually is between 4-6 points on the 60 minute corn chart. So you can either use a stop equal to the ATR or use a more precise entry and have a stop of half the ATR.

With this ATR I like to target a profit of 1 times the ATR on the trade so in this case I would be looking for a profit of 5.25 points in corn or 21 ticks. If you trade more than one lot you can take half off at 1 times the ATR and look for a move of 2 times the ATR on the rest of the position with a breakeven stop once the first target is hit. 

These are just a few of the ways I like to use ATR to manage risk and look for profit targets in the grains futures. And of course you can apply this to any futures contracts or stocks on any timeframes.

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