Ever wondered what Huck, Cyclopip, Pipcrawler and I mean when we talk about using 100/1/1 STA, WATR, or DATR?
What is the STA Strategy?
The Stop-Trail-Add (STA) strategy is basically a scaling technique used to maximize profits while minimizing risk.
The idea is to take advantage of a favorable price action by adding to your position, but still limiting the risk by moving your stop loss. It is usually expressed as the S/T/A ratio. (ex. 100/1/1, 50/2/1, etc.)
What does STA mean?
When you use the S/T/A, you’re really just expressing the ratio of
1. The size of your initial STOP loss in pips;
2. The size of your TRAIL as a ratio of your original stop; and
3. The units that you ADD as a ratio of your original position size.
For example, a 100/1/1 STA means that you initially have a 100-pip stop, a trailing stop 100 pips wide, and you’re adding the same amount of units as your initial position size every 100 pips. Consequently, having a 50/2/0.5 STA means that you initially have a 50-pip stop, a trailing stop twice as wide (100 pips), and you’re adding half the size of your original position size every 100 pips.
How do you determine the size of your STA?
Currency pairs have unique behaviors so the size of the STA should be appropriate for the pair you’re trading.
You don’t want to get stopped out too early with an uber tight STA, knowing that you could’ve caught the move with a larger STA.
One way to determine your STA is to experiment with the pairs that you usually trade and keep track of the STA sizes that would’ve profited.
Through consistent and deliberate practice that Dr. Pipslow always recommends, you’ll be able to gauge which STA works for your favorite pairs.
Another way to determine your STA would be to use the pair’s average true range (ATR).
My trader buddies use a fraction (say ½ or ¼) of the pair’s ATR as the size of their initial stop and trail it by the same amount. Of course, this also depends on whether you’re in a day trade or a swing trade.
Wait a minute. What is ATR?
As the name implies, the ATR measures the pair’s usual range based on the highs and lows of previous price action. It comes with a parameter X, which determines how far back on previous price action you’ll go.
For instance, if you’re using ATR (10) on a daily time frame, the indicator will give you the value for the pair’s average range for the past 10 days.
ATR can also be used to determine support and resistance levels (just like pivot points) for the day or the week.
In fact, I use the daily and weekly ATR a lot in my trading, especially when they line up with psychological levels or previous highs and lows.
How do you calculate daily ATR and weekly ATR?
It’s really simple. Just take the cube root of the differential between the factorial of the highs and lows… I’m kidding! You don’t have to worry about the calculations since there’s an indicator that would churn out the figures for you.
You just have to make sure that you know what the ATR is measuring and what the parameter stands for, and then apply that ATR to the appropriate time frame.In my case, I use the ATR (20) for both daily and weekly charts.
To get the DAILY ATR (DATR), I get the ATR (20) value on the DAILY time frame and divide it by two. I add this figure to the DAY open price to get the top of the day’s range and subtract the same figure from the DAY open price to get its bottom counterpart.
For the WEEKLY ATR (WATR), I get the ATR (20) value on the WEEKLY time frame and divide it by two. I add this figure to the WEEK open price to get the top of the WEEK’s range. Then, I subtract that same figure from the WEEK open price to get the bottom of the WEEK’s range.
When is it ideal to use the STA?
Since the STA strategy is about adding positions for every X number of pips, it is best used in a TRENDING environment.Here’s an example from my Best Setup of the Week trade:
In the AUD/USD chart above, I used a 100/1/1 STA and closed it at .9700 for a 21:1 reward-to-risk trade. If I hadn’t taken profits manually though, I would’ve ended up with only a 14:1 risk ratio!
Now let’s take a look at the STA applied to a RANGING environment.
In the USD/CAD chart above I used a 50/1/1 STA. I added another position at .9850 after shorting at .9900, but I got stopped out when price went back up to my adjusted stop loss at .9900 and hit the trailing stop on my second position (now around .9880). I ended up with a 30-pip loss. Yikes!
There you have it my friends! Both STA and ATR explained!
This content is strictly for informational purposes only and does not constitute as investment advice. Trading any financial market involves risk. Please read our Risk Disclosure to make sure you understand the risks involved.