It is indeed a very, very simple formula. So simple that it is almost not a formula. Nevertheless it reaches the level of the average ET post. You must have a very powerful system if you can put a stop at 0.5% and stll make money.
Two different stocks priced at $100 can have very different average daily ranges (volatilities). This means that using % to set the stoploss isn't a good idea unless one filters the stocks first based on a measure of volatility before placing the trade. Many traders prefer to set the stoploss a specific multiple of the current ATR back from the entry price, and I encourage you to test numbers like 1x, 1.5x or 2x the current ATR back from the entry price for this. Note that you can set price targets as multiples of the ATR too, preferably after performing tests using historical data.
Even ATR makes no sense. All depends form where you enter. If the ATR is huge, but your signal is generated at the top/bottom of the waves, you have extra profits if the entries are very good.So depending on where you enter, a high ATR can give you bigger profits, or bigger losses, depending on how good your entries are. The only think that works like it should is to measure, for each trade that is generated by your system, how far in open loss the trade goes. You should also check the profit for each trade. With that information you can find out (on hundreds or thousands of trades) where the optimal stop should be placed. Not taking big losses and not getting out of trades that in hindsight are very profitable, but were stopped out because of tight stops. The two points that define the risk and the reward for you are the entry and the exit. Nothing else. For the stoploss only the entry is important. If the system generates the entry signal, ATR has no relevance, because whether the ATR is high or low, the entry signal does not change. Like I always said: the entry is the most important element of each trade. A good entry gives: low open loss and better exit (smaller loss) if you have to get out. more room to let the trade develop (less stress). impact on leverage (can be higher if open loss is smaller, so bigger returns).
I like to buy at the ends of dips in an uptrend, after price has started back up again, and using ATR multiples for the stops works well for these kinds of trades. For traders who prefer to buy breakouts above previous highs, I suspect that the ATR-based stops might not be as efficient... my understanding is that a lot of breakout traders set their stops based on previous swing lows (price structure) or below the signal bar or below moving averages when going long, and perhaps these approaches gives better results than ATRs when backtested.
%% THAT [post #1]could work. NOT much ,when SPY or SH moves 0.77% a day . But simple stuff can work well sometimes. Watch this. Round up for easy math, not exact number, say copper sells for $5 per pound +/. Metals dealer pays you or me $2.50 per pound , anytime ,battle proven business for long time. One lady asked is that $5.00 + 1?? NO, that's $5.00 more or less Back to 50dma on SPY + related. Not a hint for penny stock[$5 or less] or prediction LOL