By ProfessionalTradingSystems.com

Financial markets are a constantly changing environment that requires from the successful traders to be adaptable to the changing conditions. Periods of large (volatile) movements are followed by low activity and small movements.

Fig. 1 – Large daily movements. Typical for these periods are large daily fluctuations in price.

Fig. 2 – Small market movements. Typical for these periods are small daily fluctuations in price.

Placing our Stop Loss orders is an important part of a successful trading strategy. These Stop Loss orders should be selected so as to be in line with current market conditions. When we have large movements, we use a large Stop Loss that is far from the market price, and vice versa – when we have small market movements, we use a small Stop Loss that is close to the price.

To do this, it is very appropriate to use the indicator Average True Range – ATR that measures the volatility of the market for N periods backwards. It looks like this:

It is available on any trading platform as a free indicator, so it is applicable by everyone and does not require additional installations.

Returning to Figure 1 that shows a volatile market, we will see that the 10-period ATR has the value of 170-220 pips in this cycle of the market behavior. The same indicator shows a value of about 50 pips when we have a quiet market. Difference reaching 4 times! It is considerable, isn’t it?

If we choose to trade using a fixed Stop Loss in pips – say 40 pips, it would be adequate only when the market is quiet. In a volatile market, we will be often thrown out from the market, which will lead to losing trades. The same applies if we also choose a large Stop Loss – 150 pips. Then it would be inadequately large when we have small market fluctuations.

In order to place an adequate Stop Loss, we from ProfessionalTradingSystems use a ratio of 10-period ATR for its calculation. This ratio varies depending on the trading system, but if we assume that it is 0.5, then in a volatile market we would use a Stop Loss of 85-110 pips, and in a quiet market -25 pips.

The ratio of the 10-period ATR is a very suitable tool that allows us to keep abreast with what is happening in the financial markets in an automatic way, without having to anticipate if we are to have a quiet or volatile market.

Using an appropriate Stop Loss is one of the distinguishing characteristics of successful trading systems.

Adaptability to the volatility is a conception that we from ProfessionalTradingSystems use in all our systems!

Article by Professional Trading Systems –  Forex Mechanical and Automated Systems