There are some who have developed good day-trading strategies that are successful. For the rest of us, trading within a day’s price range is the equivalent of gambling, guessing, hoping and finger-crossing.
The ATR is the average trading range which can be measured by averaging the price range between the high and the low of a set of previous days. I recommend averaging no less than 7 days and no more than 20. But really, it all depends on the type of timeframe you are using for your own risk management.
A simplification of such rule is to put stops outside the highs and lows of the trading day. This is especially effective if you wait for the end of the trading day to enter your trades or for a very clear breakout level, that you have spotted well in advance. You have to give the market some room to fluctuate between various levels until it finds its direction. You are not smart enough to know the market’s direction before the market does!
What’s the logic behind this? I think of the trading day as a time for everyone to speak their mind. The big traders often don’t speak their mind until the end of the day. Why do I think as a “non-reportable” speculator that I have an edge on the big guys? No chance. They dictate the direction. I just jump on the wagon and run with it within my own personal risk parameters. Therefore, it’s only smart for me to wait for them to speak their mind. They have shown the market (or have shaped the market) at what price they are willing to buy and sell, where support and resistance are. Guessing intraday is just gambling, especially if you plan to keep the trade overnight.
If the trading range is too wide for even the smallest of your positions, then it’s a goner. Let it go. It’s hard to see such a big move slip away from our hands, but such is the trading life. There is always another trade.