Chandelier and ATR Ratchet

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glabbeek
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Chandelier and ATR Ratchet

Post by glabbeek »

I’ve been trading stocks for almost 10 years now, but I just started looking into trading forex. The thing that surprised me the most is that just about everything is controlled using pips. One pip equals 10 US Dollar, so a pip is a constant you could say.

But is it?

Currency pairs differ a lot in volatility. In the following weekly table you can see that the red pairs are far more volatile than the green pairs. The GBP/NZD pair has a 70% change of a volatility of 600 pips a week. The EUR/GBP only has a 0.4% change.

Image

How can anyone, with this information, justify using a stoploss or a take profit off 100 pips for all pairs? In a volatile market 100 pips might be to tight and stop you out to early. In steady markets 100 pips could be to wide and would require a higher hit rate to become profitable.

The solution is off course a volatility-based strategy, hence using the ATR by Developed by J. Welles Wilder.

http://stockcharts.com/school/doku.phpi ... _range_atr

The second thing that surprised me was that 90% of the talk is about entry’s. When do you enter the market and in what direction.
Personally I never made any money entering the market, only exiting. So why is there so little talk about exits? I used to spend 10% of my time looking for ways to enter, 40% on exits and 50% on money management.
“Cut your losses and let your profits run” is a rule that I’ve lived by for the last 5 years.

The third and last thing that surprised me was the fact that a lot of people are using ‘take profit’ exits. Why???
I can understand that if you have $10.000 in the bank and you only want to lose 2% per trade that you use a stoploss of 20 pips ($200). But why would you say, upfront, what your maximum amount is that you want to win? My maximum is always infinite. This, sometimes required, profit exit must be invented by the criminals. They want you to exit early in the trend.

So what is my solution?

My solution is the chandelier exit and the ATR ratchet exit. Both are invented by Chuck LeBeau, one of the forerunners of backtesting. Through extensive testing he concluded that the most important thing in trading is a volatility adaptive exit.
I’ve used both exits with good success in stock trading for years and I’m convinced that they can outperform any exit strategy so far on this forum. The chandelier and ATR ratchet exit are made for trend trading and don’t work for scalping. Baluda’s slopestength system could be the perfect starting point for this system.

It is getting late so I have to stop for today, but tomorrow I will explain in detail what my strategy is.
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Regards,
Willem-Bram
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NeoTrader
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Re: Chandelier and ATR Ratchet

Post by NeoTrader »

Hi Willem-Bram,

nice topic you started here and I am very interested on your exit strategies and what kind of success you had/have with them.
How can anyone, with this information, justify using a stop loss or a take profit off 100 pips for all pairs? In a volatile market 100 pips might be to tight and stop you out to early. In steady markets 100 pips could be to wide and would require a higher hit rate to become profitable.
The stop loss is essential for the risk-management and also for defining the lot-size you are trading with.
In forex you use most of the times accounts with a leverage of 1:50, 1:100 or more... if you don't set a proper SL and use also a proper risk management you are going to blow your accounts in no time.

happy trading,

NeoTrader
garyfritz

Re: Chandelier and ATR Ratchet

Post by garyfritz »

Forex pairs are roughly $10 per full lot, 1.0 lot positions. Most people here trade much smaller than that. Virtually all crims support 0.1 "mini lot" ($1/pip) position sizing, and some accept 0.01 "micro lot" sizes. (However I have a strong impression that "crim ripoffs" increase a lot with micro lot trading.)

Also: not all pairs are US$10 per pip. That's only true for xxxUSD pairs. In general an xxxYYY pair is "10 YYY currency units" per pip. So USDCAD is CAD$10 per pip, EURGBP is GBP£10 per pip, etc. If I remember right, xxxJPY pairs are 10 * 100 yen per pip.

Volatility &etc: you are exactly right. I've been quietly agitating for volatility-based stops since I showed up here, but so far I haven't made much of a dent. Using a fixed pip stop is just as crazy as using a fixed dollar stop in stocks. Even with similarly-priced stocks, the individual stock volatility can be dramatically different. Volatility-based stops (based on ATR like LeBeau's stuff, or based on price action, e.g. make your stop X% of yesterday's H-L range) automatically scale your stops to the specific market.

Finally, be very wary of applying generalities to all markets. "Let your winners run" makes sense **ONLY** in a trending market. In a reversing markets, "let your winners run" too often translates into "let your winners turn into losers." (As an extreme example, imagine you hedged a basket of stocks against SPY, and you wanted to trade deviations between the stocks and the index. By definition that basket CANNOT trend for very long. You can only get small wiggles in the net value of the basket. "Let your winners run" is a guaranteed loser with that basket. With a strategy like that, profit targets or similar exit techniques are the ONLY way to grab profits.)

Forex pairs tend to trend fairly well at longer timeframes (e.g. daily) but they do NOT trend as well at shorter timeframes. If the market / timeframe you trade tends to revert a lot, then using TPs or similar are a very reasonable way to maximize your profits.

You appear to be a fairly analytical chap, so you might want to analyze how well forex pairs trend on different timeframes. I have some analysis tools for that but they run on Tradestation.
spotdespot
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Re: Chandelier and ATR Ratchet

Post by spotdespot »

I think this whole topic has a great deal of potential. I am not concerned about the placement of my stops at all - they are based on relevant support/resistance that ties in with the strategy I am using. What I find MUCH more challenging is exits and maximizing returns.

I saw a spreadsheet recently, that unfortunately I no longer have access to, but it was based on daily time frame end of day trading and involved a lot of back testing. It obviously required a trending market but it concentrated on a 3 tranche entry so entry one would for example take profit at the average daily ATR/ADR for a set period (say last 5 periods). Then tranche 2 and 3 would be set to BE. The spreadsheet really explored not just the %ATR TP 2 and TP3 might be but also the relative size of the trade.

To give an imaginary example as this isn't probably making that much sense. :lol: Let's assume we are trading EU, it has an average ATR(5) of say 100 pips we have a stop loss at the last swing high/low, which is 80 pips away. We want to risk 2% on this trade so we work out, with our account size, we can trade 4 lots. We set the first take profit (TP1) at ATR(5) - so in this case 100 pips away. What do we set TP2 and TP3 at and what lot size (of the 4 lots available) do we allocate to each trade?

The conclusions were quite interesting. I wish I had access to it but it basically argued that TP1 @ ATR(5) was fine, TP2 at say 2 x ATR(5) was fine and we should trail (not specified but perhaps % x ATR based?) for the remaining tranche of the trade - TP3. What was very interesting was that it concluded that the third "let it ride" tranche should actually be the biggest in terms of lots traded as it's potential to catch big moves made it's potential Vs the first 2 tranches huge. Obviously TP(1) gets hit far more often than TP(2) or TP(3) - often TP(1) is hit and price retraced to stop out TP(2) and TP(3) at BE, but catching the potential big moves more than compensated.

I am not entirely sure whether we can assign attributes of daily trend trades to other shorter term scenarios but it is food for thought.

One other unrelated point touches on Gary's point about generalizations. GBPCAD and EURNZD, for example, may both be very volatile in a daily range sense but intraday are completely different beasts imo. If you looked at daily ranges/volatility you would say - I would be marginally "safer" trading GBPCAD than EURNZD but that just isn't the case. Much of the time GBPCAD is like a bucking bronco and EURNZD like a fast moving racehorse.

Anyway - I will be following this thread with interest!

Cheers,
Dave.
xfr8dog
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Re: Chandelier and ATR Ratchet

Post by xfr8dog »

It is getting late so I have to stop for today, but tomorrow I will explain in detail what my strategy is.
Is it tomorrow yet? ;)

I would actually also be very interested in this topic, I hope Glabbeek will return.
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Jemook
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Re: Chandelier and ATR Ratchet

Post by Jemook »

Me too, this topic is v. interesting. Glabbeek come back! I'm going to PM him.
Please note I am no longer affiliated with Global Prime. I've moved on to my next adventure with Afterprime.

Catch me here: https://www.afterprime.com
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