Chuck LeBeau’s

Presentation
Traders Library Workshop
Scottsdale, AZ
 Major topics
„ 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
 Market Direction

„ 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.
 Average True Range
„ Setting ATR periods
„ I usually use 20 bars as my default for ATR calculations but
adjust to suit your purpose.
„ Short time period ATRS (one to five bars) adjust very quickly
to current volatility.
„ Longer period ATRS (20 to 50 bars) adjust more slowly and
are more reflective of typical or most common ATR.

Idea: Calculate two ATRS and use either largest or smallest ATR to
suit your needs.
 Applications of ATR
„ Determine direction using ATR
Example: Compare current price vs. 10 days ago.
If current price is more than two ATRs above 10
days ago price then trend is UP.
If current price is more than two ATRs below 10
days ago price then trend is DOWN.
If current price is less than two ATRs in either
direction over 10 days then trend is SIDEWAYS.
Note: Pick appropriate periods for your time frame.
 Applications of ATR
„ Use units of ATR for “Breakout” entry triggers
Example: Buy if price moves 0.60 ATRs above the Open
price. (Opening price breakout)
Example: Buy if price moves 1.75 ATRs above previous
Close. (Volatility breakout)
Example: Buy if price moves 2.25 ATRs above current 20-
day moving average. (Band breakout)
Example: Buy if price moves 0.25 ATRs above highest high
of last 20 days (Channel breakout)

Note: These numbers are just examples. Do your research to find best numbers
for you.
 Applications of ATR
„ Use units of ATR to set exit stops and profit
targets
Example: Exit if price drops 2 ATRs below
your entry.
Example: Exit and take profits when open
profit reaches 4 ATRS or more.

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.
„ Because ATR automatically adjusts as
volatility changes, its use in trading
strategies makes the systems much more
robust than using fixed dollar amounts or
points.
Average Directional Index (ADX)
„ Whenever I look at a chart the first indicator I
put up is the ADX.
„ The ADX tells me what I need to know about
the trend direction and the strength of the
trends.
„ The information I get from the ADX allows
me to select the appropriate trading strategy
for the current direction and trend strength.
 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.

The Minus DI shows the amount of

negative (downward) directional
movement
Plus DI
No DI

Minus DI

Plus and Minus DI measure

Directional Movement
Market in balance Market out of balance
ADX declines ADX rises
 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 falling ADX tells us the trend is weakening and we
can trade counter-trend.

Important: The absolute level of the ADX is not

predictive. A low level indicates that the market
was sideways. A high level indicates the market
was trending.
 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, Stochastics, Williams %R, Bands
 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.
„ If you are trading short-term you need to cut
losses but you should exit on strength.
„ Exits control risk and influence position size.
 Four Exit Priorities
1. Set initial stop loss to protect capital.
2. Add trailing stops to reduce risk.
3. Protect open profits.
4. Take profits efficiently.

It will usually require multiple exit strategies

to accomplish all four of these tasks.
 Three Important Exits

1. The Chandelier Exit

2. The Yo Yo Exit

3. The Modified Parabolic Exit

 The Chandelier Exit
A stop is placed 3 (?) Average True Ranges
from the highest high or highest close since
entry of the trade.
The stop moves upward as new highs are
made.
The length of the chain on the Chandelier will
automatically adjust to changes in volatility.
 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 four
ATRs, reduce Chandelier to two ATRs.
„ Example: when open profit reaches six ATRs,
reduce Chandelier to one ATR.
 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.
„ The Yo Yo Exit moves up and down every day
with the closing prices. (Hence the name.)
„ The Yo Yo must not be your only exit. Its purpose
is very limited and it does not protect against big
losses.
„ The Yo Yo detects important “volatility reversals.
 The Modified Parabolic Exit
„ This trailing stop moves closer and closer to
recent price as new highs are made.
 Other exits to consider
„ Trailing channel exits at lowest low in X days.
„ Moving average exits (Try 10 to 20 days in
futures, 30 to 50 days in stocks)
„ Entry signal in opposite direction
„ Time Exit - Exit after N bars (Good for
testing)
„ Profit targets (Use ADX and ATR)
„ High RSI - exit on strength - try 70 or 75
 Basic Position Sizing
„ The quantity you buy on a trade should be related to
the risk. If risk is low, buy more. If risk is high, buy
less.
„ Once you know where your exit will be you will
know your risk on any trade.
„ Example: we have a $100,000 account and we want
to limit each trade to only 2% risk (or $2,000). 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.
Our position size can be no more than 1,000 shares.
 Monitoring Performance
„ You need to schedule reviews on a regular basis
whether you are winning or losing.
„ Don’t wait until you have losses to review what you
are doing.
„ Keep good records and review often.
„ Look for trades that you should have made but didn’t.
„ Keep a chart of the size of your winners. The first
sign of trouble will be when winners get smaller.
„ Don’t be afraid to make changes.
 Key Points to Remember
„ Three directions – Up, 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.com and SmartStops.net