ATR & MM question

Beginner Questions
1

My general question is this…

Say a trader, is risk minded & uses ATR to help manage his risk in every trade. Maybe even something along the lines of a Turtle 2N method of money management.

  1. One trader is on the 5 minute charts, is looking at a timeframe above, the 15 min for his entry, sees a decent move down on the 15min & then times his entry & sets his risk to 2N on the 5 min bars…

  2. Another trader does the 15 min with watching the 30min

  3. Another trader does the 30min watching the 1hr

  4. Another trader does the 1hr watching the 4hr

  5. Another trader does the 4hr watching the Daily

  6. Another trader does the Daily’s watching the Weekly

All of them are trading 1% per N, with a 2N StopLoss… All trends from Weekly to 5 minutes are going down, have been going down for awhile. Each trader times the short entry based on a higher timeframe & also uses only 1% of account for a 2N stoploss.

My question, & the main thing that really keeps me out of Forex, probably until I get my head around it, or just assume it is what it is, & get in and never allow my account to grow beyond a certain point is this…

Swiss Central Bank intervened on 9/6/2011 & shorted their currency with a massive % of their GDP & supported the Euro against all timeframes. I looked back in history at the 1 minute bars when it happened, I forget the exact pips but want to say it was around 700 pips in 1 minute at 8am. I mean when you drilled down on that huge spike it was all in a 1 minute bar, in the opposite direction that all 6 traders had going.

How do traders confidently allow their account to grow beyond 500 bux knowing that a central bank can jack the currency in one minute bar, I imagine all stoplosses didnt work & millions of accounts were destroyed.

everyone under daily timeframes account would have been wiped & the trader on dailys might have had some kind account left, but not much considering a monthly atr kicked in all in one minute flat.

is the way to trade forex safely with MM, just to trade eurusd only, i.e. liquidity. do you feel that the major five pairs could every jack a month ATR in under 1 minute, like eurchf did. or do we just trade whatever but never let account to grow with the knowledge that this events, which are rare, but do come around & can completely zap your account regardless of proper MM & use of a ATR to set the voliality in line with your account.

just wondering what other peoples thoughts are on it. thx

2

I guess the only protection is to account for it on all timeframes, which kinda sux cause it means you can’t optimize your tp and sl on the timeframe your on. You have to leave the SL set at a level that would account for a central bank intervention.

If you want to grow the account & try to avoid the possibility later down the road for them intervening while your in a trade & your sl doesn’t work cause it was blowout…

or just know it will happen & not care & just trade on smaller timeframes with it optimized to that volatility & just pull the money out of that market on a regular basis.

Guess there isn’t a really good answer, guess as far as I will do is just account for the possibility & reduce the insane money that could be made & just make forex more realistic, for the long haul.

3

Simple answer… anything can and will happen from time to time. So were back to money management right? Trade 1% of balance and if your taken out then its no big deal providing your strat is proven over the long haul. Bet the farm on a single trade and who’s to blame? These spikes are rare but do happen. Trade accordingly!

4

You misunderstood me or I didnt communicate my thoughts or general question clearly.

I wasnt talking about betting the farm, I was talking about betting 1% of account on a single trade with a stop loss set. Im not under the illusion that a 1% stop loss will hold when 700 pips hits in under 1 minute timeframe. That would run so fast that multiple timeframe MM would blow accounts out.

5

So whats the question? In detail please. I’m on line for 30 mins and will give it my best shot.

6

I’m just wondering how other people are managing their risk…

does everyone just act like the bank interventions don’t exist?

example
5min range is 8
15 min range is 20
30 min range is 35
1 hr range is 50
4 hr range is 75
daily range is 150
weekly range is 300
Monthly range is 600

most people are setting bet to a % of account at an increment inside the timeframe they are on, then trying to time their entries, and 1% is usually considered conservative. now imagine a situation in the above example where in one minute flat a central bank jammed the currency against all timeframes at 700 to 1500 pips. it blows everyone % stop losses clean out of the water and everyone gets home and stares at open positions or even possibly wiped out accounts depending on which lower timeframe they were on.

I’m just wondering how other people dealing with this or they just not thinking about it because it is indeed rare. but my thing is i dont want to grow the account for 3 years to have a central bank just blow out all stop losses in one minute flat at multiples of everyone’s account stop loss. clearly 1% bet inside a 40 pip range would blowout an account when it goes nuclear to 1500 pips in one minute.

is everyone just placing bets on other currencies to minimize any one central banks possible action. or people only keeping a % of their trading money actually inside their brokerage account, or people trading with diff brokers for diff pair trades that way no one intervention wipes the account. just basically wonder how people are trading comfortably knowing this big whale hits on a one minute bar at times…

think of it like this, guy is trading on the 30 min bars trying to time a good entry on the hour, the 30 min bars are volatile at 35 pips so his entry single off the bottom is saying all clear, he bets 1% of his account across the 35 pips, he plans to hold the trade maybe 2 or 3 hours… then 700 to 1200 pips hits in under 1 minute blowing past his stop loss, he had 35 pips equal to 1% of his account that would me 700/35= -20% account loss or another occurence 1500/35= -42% account loss, when he was being ultra conservative at 1% bets, no one talks about sub 1% bets. just figured i would ask if anyone is countering this with some gameplan that could help me think of the situation different

7

The stoplosses do work. Your trade would be closed [B]as the price passed through the level [/B]you set your stop. The price does [B]not have to trade at the stop level.
[/B]
Does that make more sense?

EDIT: If you set a 35 pip stop and the price moves 100 pips in 10 seconds you will only lose 35 pips, not +/-100 pips.

8

Hmm… Unfortuntately, I have no comforting words here. The big boys do what they do. But you might take comfort from high impact news as an example? Big spike one way and a correction the other, only to carry on as antisapated in the longer trend. PA loves the middle ground even when trending… much better when ranging. We can’t be privvy to those huge moves but most of the time there are very strong prints left in the wake of the big boys.

EDIT: Oh almost forgot. When you get a high or a low spike above or below your stop (stop placed low or high of a swing) you can bet its a big player taking out stops proir to a contra move! (Caveat … 4h and up),

9

@D pip

Really? I was under the impression that under certain rare circumstances like news or bank intervention, the price could move so fast that it passed your stop loss before the trade got closed out at your stop loss price, thus leaving you hanging with an open position. If your right, then I guess the point of the thread is pointless. I was mainly getting at if the currency only moves at 2100 pips in a year, and you have seen a 700 pip move in one minute flat from a bank intervention, no MM would account for it unless you reduce your risk to account for a 700 pip movement, no one would do that cause it would reduce forex down to 3% a year & better sticking with a mutual fund or a bank CD. lol

@R Carter
Yeah I agree the big players control the scene, and news cant be traded on in the short term imo. I notice when the move spikes down on positive news people say it is because, the news was already priced into the rate. but when it goes in direction of the news it is moving because of the positive news. to me its just how the big players are working their longer term bets which might imply they spike it down to get a bigger position in for the longer term bet of it going up, just hard to say which they will do, act immediately or spike down and build their position at a lower rate. lol who knows but try best to reduce risk and follow trends as best ya can

10

kangi,

After posting last night I was thinking about this issue and realized there might be more that needs to be addressed. Maybe the “real answer” needs to come from the broker that would be taking your trade.

My personal experience has been with the market maker Oanda. If I set a 35 pip stop, my risk is only 35 pips with Oanda.

But the truth is I’m not sure how non market maker brokers, ECN or STP, would handle the same 35 pip stop. If they are acting as just a pass through to the inter-bank maybe your stop order would not get triggered until a willing buyer/seller steps up and agrees to take your order. In that case, yes I do think your risk could be a lot more then 35 pips.

I have a Scottrade stock account and stops only get triggered at or below the stop level/price. So if the market gaps down and opens below my stop order, my order is closed at the opening gap down price not the stop level and my % of risk is blown out of the water.

One Monday morning back in 2006 I lost over 8% of my over leveraged stock account on a gap down open. So maybe more research is needed and perhaps it does depend on the type of broker handling the trade. I’ll look around and see if I can find a better answer for you.

11

Hi Kanji,

I know exactly what your questions is the answer? well that is more difficult.

Firstly 99% of stops placed by us retail traders are NOT GUARANTEED at that level. Your broker, should price move the wrong side of your stop will attempt to cancel your order at that price OR the best price possible…

In the example that you gave regarding “The Floor” which has been set at 1.2 on EUR/CHF you are quite right in thinking that a lot people would have been seriously hit that day. Especially if they were trading on the lower time frames.

The movement was so sudden that not all stop losses could have been filled at the desired level and many would have been filled at far worse prices that expected (we’re talking 100’s of Pips here)

The answer? well there are a couple of things that could help you to avoid such disaster if you are worried about it.

  1. lower your risk. We’re all used to hearing the “don’t risk more that 2% on any trade” on these forums but personally it is unusual for myself to risk more that 0.5% (mainly I risk 0.25%) per trade… If I was caught up in the EUR/CHF debacle this would have helped somewhat.

  2. Some brokers offer a “Guaranteed Stop Loss” this means that they will cancel your order at x price even if they are unable to fill the order within the market. For this extra assurance you will generally have to pay a higher spread and you will need to check with your broker whether this is a feature of your account.

  3. Trade the higher time frames. In most cases trading a 2% risk on a smaller time frame will mean you are dealing in higher sized lots than if you trade on a higher time frame therefore by trading on higher time frames you will negate some risk especially if you use a fixed stop loss amount like the Turtles 2N method if you do not use a fixed stop method then trading higher time frames will not always equal lower sized lots as lot size will be based on difference between stop and entry.

Any Help?

DT.

12

@DT

Yeah you understand what I was getting at. I’ve given it alot of thought, I mean a $500 account, I’m not sweating this rare thing. But thinking ahead to when the account can grow to a size that isn’t easily replaceable from ‘working’ for it.

I haven’t looked into the guaranteed stop loss options yet. I will need to read up on it.

The things I have thought of is…

  1. Idea is CHF is going down, trade other non CHF pairs to reduce the exposure that central bank has effect on your other pairs. But this isn’t a ‘real’ solution, since it is possible for the blood bath to dig into your other trades profits & actually force other positions to close, to compensate for the rate they got you out at. I heard one trader actually woke up with a -685 pip open position that never closed out on that day in the EURCHF, he talks about being just stunned for a few minutes that it was still open.

  2. I’m thinking since opening other trades to offset or minimize bank intervention isn’t absolute, then to me the only answer is to set an amount in your head that is the absolute worse case scenerio that you would want to lose in a bank intervention. say that amount is 20%, then I’m toying with the idea of putting 20% into 5 brokers. Not with the idea of having a 20% Stop Loss, still doing a 1% set stop loss per trade but max damage would be 20%. or whatever number everyone can stomach as that max amount. to me this is the only way to reduce bank interventions that happen every now & then from completely wiping out what might take years to build up. Obviously you couldn’t open up the same trade on the other accounts, since that would defeat the purpose of setting the max damage from ‘slippage’ or a landslide in a short span of time.

  3. just trade like it doesn’t matter about possibility of bank interventions, & know that you will pull out xxx dollar amount out of the account every month. which basically means you don’t grow the money but you just use it as a job or cash register. then when the wipe occurs even with a 1% stop loss, you have multiple months you pulled out the 100% gain on original amount, thus your way ahead, just reload a new balance & get on with the trading…

Just my thoughts on it, up to this point.

@D-Pip
Ya I feel your pain on the gap opens. I hate when you time a weekly trend, then get the daily trend started to kick back in line with the weekly then… at that apex it goes sub nuclear gap in the opposite direction of the main trend. then you either ride out the slow drift back that screws the people that got excited about the massive jump & then it slowly reverses back on them towards your break even. Which sometimes you can wait it out, & the money is just locked up for eons as it drifts back.

Seems to me trading or figuring the direction of things isn’t really that hard, the hard part of trading multiple markets is figuring out how not to get ef’d over with this occurences/manipulations that aren’t priced into the data we are all staring at. lol

It’s almost like you need to look at the biggest spikes & see how many multiples it is over the standard ‘normal’ trading range, to guage how risking an instrument really is. like something that trades in a 2% to 5% range that goes 75% once a year in one day. is pretty ridiculous since most people are setting bets like 1% based on the 2% to 5% range. might be better to compare apples to apples, before setting bets… i.e. something 4% to 10% range that goes 40% is alot less risk than the 2% to 5% that goes 75%…

2% to 5% trading range = 3% instrument movement / 75% spike = 25 multiples of normal trading range, a 1% bet on 3% trading range, would nail you on the spike at 25 multiples or -25%

4% to 10% trading range = 6% instrument movement / 40% spike = 6.6 multiples of normal trading range, a 1% bet on 6% trading range would nail you on the spike 6.6 multiples or -6.6%

guess it is all in what a trader calls risk, the normal daily in and out trading range or the big rare occurence that can wipe out alot of months or years of work. Trader 1 would say it is the riskier instrument is the 2nd one, and trader 2 would say it is the first instrument, both would be right… I suppose… lol

13

With any investment portfolio (of which speculation can / is a part) you should make sure that you have diversified across different asset classes…

What I mean by this is that really forex is a high risk venture and as such you should not devote all of your money to it. Now if you are talking about the fact that you have got £500 spare and want to have a pop at currency trading then by all means go for it but if you actually manage to make a decent stack in the future the ‘ideal’ would be to split your total amount of money into seperate pots and divide this into different asset classes. You would then end up with something like

15% - Cash Deposits
25% - Fixed Interest Securities (Bonds)
10% - Property
35% - Equities (stocks / shares)
20% - Forex.

The purpose of this is to reduce asset class risk (e.g. the EUR/CHF thing in Forex) so if you do take a big hit on one venture then money that is tied up in others is still “safe”.

you obviously need more than £500 to do this but hopefully that helps to answer your question about what you maybe should do once you’ve made a packet on the currency markets :wink:

DT.

14

That totals 105%! :33: Good advise in any event. :13:

15

@DT

You made an excellent point. Guess at times, at least with me, I get drilled down into one market or 2 markets. Guess get absorbed into the particular nuances of the specific market at the time, & loose sight of allotting more time to juggling the other assets classes, & not getting too absorbed into any one market.

@RCarter

Lmao, I guess he is calculating where to invest the excess gains with the 105% allocations. Hopefully I’ll be calculating more than 5% a year. ;o)

16

LOL - that is how I roll… I’m a little “special” on occasion…

@Kangi - Should also have mentioned that just because it is advisable to split your assets over the asset classes it doesn’t necessarily mean you have to micro manage them all.

If you want to concentrate on currency trading then that is where your focus should be I would use the rest of the pots to invest in funds that fulfilled the various other criteria. That leaves you clear to focus on currency trading should that be your main focus

Trying to do to much can lead to stress and mistakes.