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Chuck LeBeau’s Presentation
Traders Library Workshop Scottsdale, AZ
Determining market direction Strategies for Up, Down and Sideways Preparing the “setup” Entry triggers Exit strategies Simple advice on position sizing How to monitor performance
Markets have three directions (not just two)
Identifying sideways direction takes planning
Know your time frame
Direction depends on your time frame
Select appropriate strategy for direction and time frame
Multiple strategies are required
Two Important Tools Average True Range (ATR) Average Directional Index (ADX) These two tools will be used throughout this workshop and it is important that everyone have a thorough understanding of how they work and how we apply them. .
Range True Range “True” range adjusts for gaps Sketch .True range bars .
Calculating the Average True Range (ATR) The Average True Range is the largest of the following: Today’s high minus today’s low. Today’s high minus yesterday’s close. . Today’s low minus yesterday’s close.
Idea: Calculate two ATRS and use either largest or smallest ATR to suit your needs. .Average True Range Setting ATR periods I usually use 20 bars as my default for ATR calculations but adjust to suit your purpose. Longer period ATRS (20 to 50 bars) adjust more slowly and are more reflective of typical or most common ATR. Short time period ATRS (one to five bars) adjust very quickly to current volatility.
If current price is less than two ATRs in either direction over 10 days then trend is SIDEWAYS.Applications of ATR Determine direction using ATR Example: Compare current price vs. If current price is more than two ATRs below 10 days ago price then trend is DOWN. If current price is more than two ATRs above 10 days ago price then trend is UP. 10 days ago. . Note: Pick appropriate periods for your time frame.
(Opening price breakout) Example: Buy if price moves 1.25 ATRs above current 20day moving average. (Band breakout) Example: Buy if price moves 0.Applications of ATR Use units of ATR for “Breakout” entry triggers Example: Buy if price moves 0. Do your research to find best numbers for you. .25 ATRs above highest high of last 20 days (Channel breakout) Note: These numbers are just examples. (Volatility breakout) Example: Buy if price moves 2.60 ATRs above the Open price.75 ATRs above previous Close.
Example: Exit and take profits when open profit reaches 4 ATRS or more.Applications of ATR Use units of ATR to set exit stops and profit targets Example: Exit if price drops 2 ATRs below your entry. Note: We will be covering these and other uses of ATR in detail when we discuss Exits later today. .
.ATR Summary Get to know and understand ATR and use it wherever possible. its use in trading strategies makes the systems much more robust than using fixed dollar amounts or points. Because ATR automatically adjusts as volatility changes.
. The ADX tells me what I need to know about the trend direction and the strength of the trends.Average Directional Index (ADX) Whenever I look at a chart the first indicator I put up is the ADX. The information I get from the ADX allows me to select the appropriate trading strategy for the current direction and trend strength.
The Minus DI shows the amount of negative (downward) directional movement .Components of ADX The ADX is made up of the Plus DI and the Minus DI The Plus DI shows the amount of Positive (upward) directional movement.
Plus DI No DI Minus DI Plus and Minus DI measure Directional Movement .
Market in balance ADX declines Market out of balance ADX rises .
A falling ADX tells us the trend is weakening and we can trade counter-trend.Applying the ADX The direction of the ADX is the key! A rising ADX tells us the trend is strengthening and we should follow it. A high level indicates the market was trending. . A low level indicates that the market was sideways. Important: The absolute level of the ADX is not predictive.
Stochastics.ATR and ADX Setups Before selecting our trading strategy for a particular market we use ATR or ADX to tell us the direction and trend strength. Examples of Trending strategies: Buy on breakouts (ADX. Channel breakouts) Buy on dips (Buy ATR or RSI dips) Buy continuation of trend (MACD) Examples on non-trending strategies: RSI. Williams %R. Bands .
If you are trading short-term you need to cut losses but you should exit on strength. Exits control risk and influence position size. .Exit Strategies Our exits (not our entries) determine the outcome of our trades If you are following a trend then good exits will cut losses and let profits run.
Four Exit Priorities 1. . Add trailing stops to reduce risk. 4. Set initial stop loss to protect capital. 2. It will usually require multiple exit strategies to accomplish all four of these tasks. 3. Take profits efficiently. Protect open profits.
The Yo Yo Exit 3.Three Important Exits 1. The Modified Parabolic Exit . The Chandelier Exit 2.
The Chandelier Exit A stop is placed 3 (?) Average True Ranges from the highest high or highest close since entry of the trade. The length of the chain on the Chandelier will automatically adjust to changes in volatility. The stop moves upward as new highs are made. .
reduce Chandelier to one ATR. reduce Chandelier to two ATRs. Example: when open profit reaches four ATRs.Adjusting the Chandelier Exit Start new trades with default exit of 3 ATRs from entry. As profits are accumulated. reduce the ATR units to lock in more profit. . Example: when open profit reaches six ATRs.
The Yo Yo detects important “volatility reversals. (Hence the name.The Yo Yo Exit The Yo Yo Exit is similar to the Chandelier Exit except the Yo Yo Exit hangs down from the most recent close. Its purpose is very limited and it does not protect against big losses. The Yo Yo Exit moves up and down every day with the closing prices.) The Yo Yo must not be your only exit. .
The Modified Parabolic Exit This trailing stop moves closer and closer to recent price as new highs are made. .
Moving average exits (Try 10 to 20 days in futures.Exit after N bars (Good for testing) Profit targets (Use ADX and ATR) High RSI .Other exits to consider Trailing channel exits at lowest low in X days.exit on strength . 30 to 50 days in stocks) Entry signal in opposite direction Time Exit .try 70 or 75 .
Example: we have a $100.000 shares.000). Once you know where your exit will be you will know your risk on any trade. If risk is low. We want to buy XYZ stock at $25 per share and our stop loss exit will be at $23 so our risk is $2 per share.Basic Position Sizing The quantity you buy on a trade should be related to the risk. buy more. Our position size can be no more than 1. buy less. If risk is high. .000 account and we want to limit each trade to only 2% risk (or $2.
Keep a chart of the size of your winners. Look for trades that you should have made but didn’t. Keep good records and review often. The first sign of trouble will be when winners get smaller.Monitoring Performance You need to schedule reviews on a regular basis whether you are winning or losing. . Don’t be afraid to make changes. Don’t wait until you have losses to review what you are doing.
Down and Sideways Know and learn to love ATR and ADX Use entries based on direction and timeframe Exits are critical Apply conservative money management Keep records and perform periodic reviews For more tips on trading please visit Chuck LeBeau’s Web sites at TraderClub.Key Points to Remember Three directions – Up.net .com and SmartStops.
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