forex-scalping.com

ATR in price units: 0.00042 is 4.2 pips, 0.045 is 4.5 pips, and the lot sizes that follow

The ATR indicator in MT4 and MT5 prints its value in price units. That trips people up when converting to a stop.

EURUSD, ATR(14) on M5 shows 0.00042. A pip is 0.0001, so that's 4.2 pips. USDJPY on the same timeframe shows 0.045. A pip is 0.01, so that's 4.5 pips. If you see 0.0042 on EURUSD, you misread by a factor of ten, since that would be 42 pips on M5.

Now use 1.5 x ATR as a stop, with $100 risk per trade on a $10,000 account.

EURUSD: stop 6.3 pips. Pip value for one lot is $10. Lots = 100 / (6.3 x 10) = 1.59, so 1.58 lots at a 0.01 step, risking $99.54.

USDJPY at 155.00: stop 6.75 pips. Pip value for one lot is 1,000 yen, or 1,000 / 155 = $6.45. Lots = 100 / (6.75 x 6.45) = 2.30, so 2.29 lots, risking $99.7.

The same dollar risk gives 1.58 lots on one pair and 2.29 on the other, because the pip value differs. A fixed lot size across pairs doesn't give equal risk even if you use the same ATR multiple.

On the platform the order of steps is read, convert, multiply, size. I keep a small table on the desk with each pair's pip size and pip value next to the current ATR, and I update the yen value when the rate has moved by a few percent.

Spread should be compared with the same number. On the EURUSD example, ATR is 4.2 pips and a spread of 0.7 is 17% of it. On USDJPY ATR of 4.5 pips with a spread of 1.0 is 22%. So the yen pair costs a larger share of the typical bar even though the ATR is similar. If you apply a cap on spread as a share of ATR, you need the same unit on both sides, and conversion is the step people get wrong. Compute everything in pips first and compare afterwards.

The multiple changes the size a lot. At 1.5 x ATR the stop is 6.3 pips on EURUSD. At 1.0 x ATR it would be 4.2 pips, giving 2.38 lots for the same $100, and at 2.0 x ATR it's 8.4 pips and 1.19 lots. A smaller multiple means a bigger position and more exposure to noise, since ATR is the average range of one bar, and a stop 1 x ATR away sits inside the range an ordinary bar can cover. The right multiple is something to test on your own data, with the lot size falling out of it.

ATR also changes through the day, so the lot size from an ATR rule changes too. With ATR at 6.0 at the London open, 1.5 x ATR gives a 9 pip stop and 1.11 lots. By late afternoon at 2.5 pips, the stop is 3.75 pips and the size would be 2.67 lots, which is bigger than the open even though the market is quieter. Many people cap the maximum size, or set a minimum stop of 5 pips, so that the quiet hours don't produce the largest positions of the day.

For gold or indices the same steps work, but the units are different. If gold ATR on M5 reads 1.35, that's $1.35 in price, and on 0.1 lot of 100 oz contracts, a $1.35 move is $13.50. Check your broker's contract size for each symbol, because it varies, and the value of one price unit per lot is the number that goes where I used the pip value for the currencies. Once you have it, the formula is the same: risk divided by stop in price units times value per unit.

Had a bit of a shock on gold a few years back. I sized a trade on the usual 100 oz contract, and on that broker the symbol was set up as 10 oz per lot, so I was risking a tenth of what I thought... I only noticed because the P&L looked daft after the first wee move. Mind you, it could just as easily have gone the other way, and I dont like to think about that. Ive since had a different broker whose index CFD was a dollar per point on one symbol and ten on another, wich I only found out by reading teh spec sheet, definately not by guessing. Cant be bothered with surprises like that now, so I check each symbol before I place anything.

G.