Mapping Your Voyage of Discovery - CQG.com

2. What is the Average True Range on the chart you are analysing?For me, risk and its relationship to volume is one the critical relationships that have to beplaced in a consistent framework. A key element in achieving this is to clarify the timeframechart and the Average True Range that it is currently displaying. A common mistake is toreference an intraday chart that has a range that is far higher than your concept of risk interms of ticks. Picture yourself as a trend follower. Your predefined risk on any trade isnever more than ten ticks, but you are analysing off a 60-minute chart that has a range offifty ticks. At what point can you truly clarify that your trade is wrong based on a bar thatcan move five times more than risk?When visiting traders, one of the first questions I ask them, are what timeframe charts doyou use? The answer is always a variation of “oh I use a thirty, sixty, plus the daily andsometimes go down to the five or two minute”. No one has ever said, “I use the timeframechart that fits with my concept of risk and volatility”. If you do this, then you have created afluid framework that rides the waves of volatility in a consistent manner, and provides astructure for which your momentum indicators of choice can be utilised. The basic rules areas follows.- If the Average True Range is below your concept of risk in ticks then the timeframechart is too low, and the information is irrelevant.- If the Average True Range is more than double your concept of risk, in terms ofticks then the timeframe chart is too high.To put this in some sort of context, during the craziness of 2011, there were times when thetimeframe I was referencing on crude oil was down to a one-minute chart. In contrast,during the moribund period in early 2012, this had risen to a ten minutes at its lowest, androse to as high as a sixty minute.