Volatility Based Stops

Discussion in 'Trading' started by riskaddict, May 3, 2010.

  1. I failed statistics two times in college I blamed it on ADD but most likely i'm just an idiot. My question is about using ATR as a way to figure out the probability of success (reaching target price) and failure (being stopped out) of a trade before I take it.

    Example: I want to short the YG today around lets say 1187. YG opened at 1179.50 an has an ATR of around 16. Does this mean there is a 68% chance (1 standard deviation) of the YG hitting 1195.5 and a 68% chance of the YG hitting 1163.5 sometime during the day? I'm trying to picture those stupid bell shaped curves :eek:

    So I sell short at 1187 my stop is 1196 (just outside 1 ATR and right around my desired risk for the trade $300)

    And my initial target is 1175.70 which would give me a $368 gain but is well withing 1 standard deviation and would seemingly have a greater probability of success.

    So am I using the ATR correctly and is that 68% number being used correctly in this circumstance?

    Please be gentle :D