Using ATR To Determine Your Stop

Stops

The above system is a reversal system because you buy on a positive moving average crossover and then close and sell on a negative moving average crossover. But this means that an existing open position can potentially go into a loss larger than you account can sustain before it goes into profit. Stops are used as part of money management - to manage the capital in your account and to prevent large losses if you are unable to watch your positions in real time. With bitcoin, stops are valuable because the price is very volatile and can move rapidly. Such movements can trigger a margin call and wipe out the capital in your account.

One method of determining stops uses a calculation of recent price volatility called the Average True Range or ATR. Typically, a trader would place a stop on their trades at 3 x ATR. Most trading platforms provide an ATR indicator which is plotted below the price chart. When you are looking open a trade, you can see from the ATR chart the current value and place your stop at 3 x ATR value. 

For example, in the chart below the current 21 period ATR reading for Bitcoin is USD 60. Therefore, if I place  trade now the stop would be plus or minus USD 180 (3 x USD 60). When you are buying, your stop is below the buy value at (buy price - stop) and when you are selling, the stop is higher than the sell value at (sell price + stop). For the type of trading I am doing with the Plus500 daily bitcoin CFD, I am using a 1 ATR stop plus the spread which is about USD 15.00 currently.