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I’ll showcase a trade from my income system I built in 2022 when daily expirations were first introduced and more [tap to join us for Closing Playbook]!
Most traders think in dollars. Professionals think in risk units. By using Average True Range (ATR) to define risk, you remove randomness from your entries and exits and start trading based on what the market is actually doing — not what you hope it will do.
Define Your Risk in ATR, Not Emotion
The first rule is simple: Never place a stop where it can be hit just from normal noise. That’s where ATR comes in.
The ATR tells you how far a stock typically moves in a day, including gaps. A 1 ATR stop means the market has to move one full daily range against you — not just tick around inside normal fluctuation — for you to be wrong.
If you place your stop closer than 1 ATR, you’re not giving the setup room to work. You’re just volunteering to get shaken out. Especially on shorter timeframes, defining your stop at 1 ATR below support or above resistance keeps it outside the zone of pure chance.
Structure Your Target for Positive Expectancy
A stop is only half the equation. You also need a target that gives your trade positive expectancy. A 1:1 setup — risking 1 ATR to make 1 ATR — might look clean, but it won’t get you ahead.
Your minimum target should be 1.5 to 2 ATR, depending on your edge. If you aim for 3 ATR or more, expect fewer winners — but larger payoffs when they hit.
For example, if you buy on a bounce off the 20-day exponential moving average with a stop 1 ATR below the entry, your target should sit at least 1.5 ATR above that entry. That aligns your risk and reward with the math behind your setup, not just your gut feeling.
Once you start using ATR to frame every trade — entry, stop and target — your process becomes consistent. And consistency is what separates a strategy from a gamble.
Let me know if you want a version of this paired with visuals or a real chart example.
Kane Shieh
Kane Shieh Trading
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*This is for informational and educational purposes only. There is inherent risk in trading, so trade at your own risk.
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We develop tools and strategies to the best of our ability, but no one can guarantee the future. From 02/04/2025 – 02/03/26, the average win rate on live published trade alerts is 72.6%. The average return on a $5k starting stake is $207.34 on both winners and losers, with an average hold time of less than 24 hours.
