Revisiting ATR Based Targets

Over the past few days, I entered a series of highly concentrated and correlated positions in anticipation of Japanese yen short covers. Closing my trades on Friday, I only realized about 50% of the total potential. This is where I think ATR-based take profit targets can solve this.

SGDJPY Daily

Since all JPY pairs exhibited the same price action behavior, I'll focus on the SGDJPY pair. The true potential of this trade was 5R if I closed at the very bottom.

Of course, it's not easy to anticipate the very bottom. In fact, it's nearly impossible. Instead, my philosophy has been to let the trade run and trail my stop loss instead of setting a take profit target.

This would be feasible in steady trending market conditions. However, it's not a great strategy for high-impact momentum moves simply because I'm returning profits and incurring swaps in anticipation that the move will continue lower.

To "lock in" this trade after it has captured the bulk of the momentum move, I need to set a take profit based on two considerations:

1. It's far away enough so it allows me to trail my stop loss in steady trend following market conditions
2. It allows me to capture high-impact anomalies where a retracement is likely to occur

In the chart attached, SGDJPY sold off 405 pips since my short trade. With an ATR of 65 pips, this represents a 6.23 multiple. In other words, the high-impact move was approximately 6 times stronger than the average volatility observed over the past ten days.

Looking at my other Japanese yen short cover trades, I observed moves approximately 4-6 multiples of the ATR. If I were to use a rule of thumb, I could potentially set a take profit that's 5 times the ATR so that I'm not riding the retracement in the event of a high-impact move.