Compute a Five-Day ATR and Turn It Into a Position

[Fairman]

Compute a Five-Day ATR and Turn It Into a Position

Daily ranges of the last five sessions on a pair, in pips: 70, 85, 60, 95, 80. Your account has 6,000 dollars, risk is 1 percent, pip value is 10 dollars per lot, and your stop rule is 1.5 times ATR.

Average the ranges: 70 plus 85 plus 60 plus 95 plus 80 is 390. Divide by five: 78 pips. This is a simple five-day average range, a rough stand-in for ATR.

The stop is 1.5 times 78, which is 117 pips. Risk amount: 60 dollars. Risk per standard lot: 117 times 10, which is 1,170 dollars. Lot size: 60 divided by 1,170, about 0.051. Round down to 0.05.

Actual risk: 0.05 times 1,170 is 58.50 dollars.

Look at what the number tells you. A 117-pip stop is wide for an intraday trade, so this setup suits a swing approach with a multi-day hold. A trader who wants a 30-pip stop on this pair is placing it well inside a normal day, which implies frequent noise stop-outs.

Sensitivity matters. If tomorrow's range is 140 pips and the oldest day drops out, the five-day average becomes 92, the stop 138, and the lot size drops to about 0.043, which rounds to 0.04. Volatility changes feed directly into position size.

Real ATR uses true ranges, including gaps, and a 14-day window, but the logic is identical.

Exercise: compute the five-day average range for your pair, and the stop and lot size it implies.

[FXS HongKong Scalper]

A simple and practical example. Using a five day average range makes the stop adapt to current volatility. For scalpers using lower timeframes, the same approach with M15 or H1 ATR works well, with smaller stops and larger lot sizes.

[Shadow Trader]

Say a trade is opened at 4:58pm New York time on a Wednesday. The target is five pips, and price drifts sideways instead. At 5:00pm the position is still open, and the account quietly gets charged three days of swap instead of one.

The reason is settlement. Spot FX settles two business days out, so a position rolled on Wednesday has to cover the weekend that falls inside that settlement window. Brokers book the extra two days on Wednesday for most pairs, which is why the debit looks oversized. Some pairs and metals use a different day, so the rule is not universal.

On a five pip scalp, the swap on a standard lot of a negative-carry pair can eat a visible chunk of the profit, and on a position that goes nowhere it turns breakeven into a small loss. Positive-carry positions get the opposite treatment, which is occasionally a nice surprise.

The fix is not complicated, it is just easy to forget. The swap columns in the contract specification show the rates for each pair, and the same page usually says which day carries the multiple.

Does the triple swap day on your broker ever differ between FX pairs and gold or indices, and did it catch you out the first time?

[Fairman]

The calculation checks out. The five day average range is 78 pips, the stop at 1.5 times that is 117 pips, and 60 dollars of risk allows about 0.051 lots, rounded down to 0.05. The actual risk of 58.50 dollars sits just under the plan. The observation that a 117 pip stop suits a swing approach is important. A trader who uses ATR based stops needs to match the holding period to the stop size. A stop sized for daily volatility belongs on a trade expected to last days, not hours, since intraday moves rarely need that much room.

[Fairman]

The sensitivity example shows how quickly volatility feeds into size. One 140 pip day replacing a 70 pip day raises the five day average from 78 to 92, an 18 percent increase, and the lot size falls from 0.05 to 0.04. With a five day window, a single unusual day has a big effect. A 14 day window, as standard ATR uses, would dilute the effect: replacing one day out of fourteen moves the average by about 5 pips. So the choice of window length is a trade off between responsiveness to changing conditions and stability of the stop and size.

[Amanhasnoname]

I tried the idea on EUR/USD with ranges of 62, 71, 55, 80 and 67 pips, which averages 67. A stop of 1.5 times that would be 100 pips, no use to me as a scalper, so I use the number differently. I take about 15 percent of the average range as the stop, roughly 10 pips, and 20 percent as the target, roughly 13 pips. With 6,000 dollars and 1 percent risk, 60 dollars over a 10 pip stop is 0.6 lots.

The bigger value is as a daily budget. If by midday London the pair has already traveled around 80 percent of its average range, I stop taking continuation trades and only look at fades, or stay out. I logged this for two months, and trades taken after that point won about 38 percent of the time against 49 percent earlier in the session.

So the range figure sizes the trade and also tells me when the day is probably finished.

[Fairman]

The difference between simple daily range and true range matters on days with gaps. True range takes the largest of three values: today's high minus today's low, the distance from yesterday's close to today's high, and the distance from yesterday's close to today's low. On a day that gaps up and continues higher, the true range captures the gap, while the simple range doesn't. For currencies, gaps are mostly limited to Sunday opens, so the difference is usually small. For other instruments, like stocks or indices, it can be significant, and standard ATR is the better measure.

[Fairman]

The point about a 30 pip stop on this pair is worth emphasising. If the average daily range is 78 pips, a 30 pip stop sits well within normal intraday movement and would be hit often by noise on any trade held for more than a few hours. That's fine for a scalp with a quick target, but not for a swing trade. Computing the five day range for your pair, as the exercise suggests, gives a quick sense of what stop sizes are realistic for each holding period. Has anyone here switched to ATR based stops and noticed a change in how often you were stopped out?