In this hour-long presentation, John Paul’s trading focuses on risk, reward, and finding the best trades in futures markets. Firstly, trading is risky business. Only trade with money you can afford to lose. Because the material is educational and for demonstration purposes, some trades may be taken that normally would have been avoided.
Many indicators attempt to predict future price movement based on previous price behavior. These indicators are not forward-looking – they lag behind. In some cases, the ATR (Average True Range) can fall victim to this, but in many cases, it’s useful for determining market volatility. If the market suddenly crashes due a news event, glitches in trading algorithms, or something else, do not expect the ATR to save you. However, such events are rare. The ATR, configured with a value of four, will average the price movement of the last four bars. In the E-mini S&P, if this value is higher than five, it’s too volatile. If it’s lower than one, it’s too slow. For the maximum stop loss John Paul likes to use, double the ATR value and round it down to the nearest tick. That’s the catastrophic stop.
For the Atlas Line, other stops include the prove-it and time-based. With the prove-it, you’re waiting for price to close on the opposite side of the line. As soon as it does, get out. For the time-based, if the prove-it stop does not occur, you are waiting until four bars close (20 minutes on a 5-min chart). Remember, stop losses are only used when the profit target is not reached. These three stop loss strategies help you manage risk, because no matter what the market does, you have exact rules to get you out of the trade. Some traders make the mistake of letting trades go on longer than they should. The longer a trade remains open, the more dangerous it is. An open trade means a longer window for price to suddenly head in an undesired direction.
John Paul’s Trading Video Shows Two More Ways to Trade Carefully
Another way to manage risk with the Atlas Line is to check how far away price is from the line itself. This distance, as John Paul describes, indicates whether a market is “overbought” or “oversold.” Both conditions simply mean price will likely stagnate (that is, not move much) because of recent volatility. This is useful because you don’t want to take a trade when the market is too tired to make big moves. Yes, it’s possible for the market to come back to life. For the meantime, John Paul says it’s best to stay out.
As previously mentioned, news events, can cause sudden, significant shifts in volatility. Although some events cannot be predicted, others are scheduled and published on websites like Bloomberg. Simply Google “economic news calendar” or visit the Day Trade to Win website to access a listing of the week’s upcoming events. Look for any events marked as high-priority; certainly those occurring in the country or affecting the country whose currency or index you’re trading.
Lastly, an often overlooked way to reduce risk is to use a reasonable profit target. It would be unwise to assume the market is capable of producing a three point winner at any time during the day. Likewise, going for one point may be shortchanging yourself. An objective, careful approach is better. This is why John Paul’s trading uses profit targets based on the ATR. In the end, his profit target and stop loss is dependent on the ATR, and therefore what the market can produce.