Many traders do not use stop loss orders for fear that they will be stopped out only to see the price move in their favor once they are out. The truth is that they may not have entered at a strong level of supply or demand and should have been more patient with their trading. There are times that due to the volatility of the stock, their stop was just too tight for the market noise.

The range of the stock's average movement can be measured by looking at the average true range (ATR) which is a feature available on most charting software. The range of a stock's price is the difference between the high price and the low price during a period of time. The true range is a little different in that it also includes any gapping that may have occurred from the prior period. So the average true range measures the stock's price vibration (average movement between high and low) over a period of time. The default is usually 14 periods.

The ATR of a stock will differ based on the period you have your chart set for. If you are viewing a daily chart, the ATR will refer to the average movement that stock will make between the high and the low for the day. If you have your charts set for 15 minutes, then you will see the average movement for every 15 minute period.

When we set stops, we want to exit based on our trade not working out, not because we were caught in the normal vibration of the stock's price. We can do this in several ways. The first is to filter out trades and be more selective in the supply and demand levels we will use for entries. When we enter a long position, it should be at a demand zone and our stop is immediately placed below that demand. For a short position, we enter at supply and place our stop just above that zone. If we only use high quality zones that are thicker than the ATR for the time frame we are trading, we have a very low chance of being stopped out unless the trend is reversing. I use a measurement of Ω of the ATR to filter out thin zones. Thin zones that are smaller than the Ω ATR may have a higher chance of being pierced due to market noise.

Another way that some traders stay out of the range of the stock is to place their stop one to one and a half times the ATR below demand or above supply depending on their position (long or short). This is not a technique that I employ, but is a popular one that I have seen used often. My belief is that if I just stick to thicker zones (larger than at least half the ATR), my stops should not be run. If demand is violated, then a lower low has been created. The definition of an uptrend is higher lows and since the lower low breaks that definition, I want to be out because I now have a lower chance for the trade to work. The same is true for a breach of supply. The higher high doesn't fit into the definition of a downtrend and decreases my chance for success in the short position.

Whatever method you decide to use, make it a rule and stick to that rule. Having filters that reduce the trades we take to higher quality trades is beneficial. Making fewer trades means that we are focusing on only high quality trades with a high probability of profiting. And high probability equals consistency and that is the key to success in trading.