Markets don’t move in a straight line—if they did, trading would be an easy endeavor. Trends have ebbs and flows that can provide traders with opportunities beyond just trading the overall trend. This wave-like behavior also presents some risk, but understanding volatility can help you mitigate much of this risk.
Quantitative analysis (QA) of a particular market can help you identify its market structure (trend and subtrends) and help you overcome trend bias before placing a trade. QA can also help determine a reasonable stop or profit target based on volatility using the market’s average true range (ATR).
Watch this video to learn more:
Topics discussed in this free livestream:
- How to identify market structure
- How to identify the phase within the trend
- Probability-based analysis of previous trend information to identify profit and stop-loss targets using ATRs
What is Market Structure?
Market structure is a fancy term for the bias of the market you are trading. A bullish market structure favors prices moving up over time; conversely, a bearish market structure indicates that prices are trending downward. But because trends don’t occur in a straight line, there may be opposing moves in any given trend (e.g., a rally in a bearish market structure, a downturn in a bullish trend).
The first thing to understand when determining a trade entry is to understand the market structure—is it bullish or bearish?
Phases within the Market Structure
The way price moves during market structure can usually be described as “wave-like”—meaning the market can advance and retreat in the direction of the market structure multiple times during a trend. These ebbs and flows can be described in terms of phases: a phase 1 move advances the market structure, and a phase 2 move goes in opposition to the overall trend. Understanding which phase the market structure is experiencing can help you determine your position entry.
The Importance of Volatility Using the Market’s Average True Range
Volatility is defined as how much a market can change over time. Understanding volatility can help you manage expectations of a trade. Whether you’re a day trader or long-term investor will guide how much you expect out of a trade, as the life expectancy of your trades will differ.
One common volatility measure is the average true range (ATR), developed by J. Welles Wilder. ATR depends not only on the market but also on the chart frequency and length. The ATR (or multiples thereof) can be added (or subtracted) to an entry price to define a profit target. Likewise, ATRs can be used to define a stop-loss level. Applying QA to historical data can assist with using a suitable ATR level for your exits, based on your risk profile.
Analyze Market Structure with ATR
Learn how to analyze market structure and volatility using quantitative analysis and average true range. With ATR, you can help improve your trend bias and set smart profit and stop-loss targets. Understanding the trading environment via market structure is a good starting point to the lifetime of a trade. Using volatility to attain reasonable profit targets and safeguard your account with sensible stop-losses is a common approach to guide your execution. They not only assist with trading but help you anticipate when market structure might change.
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