ATR Trailing Stops

ATR Trailing Stops are a way of using the principles behind Average True
Range - a measure of the degree of price volatility - and using it to set
trailing stop-losses.

The idea is that ATR gives a guide to the average volatility of price
movements over a given period, making it easier to be more precise about
where to set the stop-loss.

True Range is calculated by looking at the daily price change and using
the greater of three calculations: (high – previous close), (previous close –
low) or (high – low).

In the case of ATR Trailing Stops, the Average True Range is the True
Range calculation over a default 21-day period average.

A multiple of the ATR - in this case a default multiple of 3 - is plotted

around the ATR line. Welles Wilder, who invented the ATR Trailing Stop
preferred ATR multiple of 3.

These settings can be adjusted by launching the ATR Stops settings

modal.

Time your Exits with Average True Range

(ATR) Trailing Stops
ATR Trailing Stops are primarily used to protect capital and lock in profits on individual
trades but they can also be used, in conjunction with a trend filter, to signal entries.

Average True Range ("ATR") was introduced by J. Welles Wilder in his 1978 book
New Concepts In Technical Trading Systems. ATR is a measure of volatility for a stock
or index and is explained in detail at Average True Range. Wilder experimented with
trend-following Volatility Stops using average true range. The system was
subsequently modified to what is commonly known as ATR Trailing Stops.

ATR Trailing Stop Signals

Signals are used for exits:

 Exit your long position (sell) when price crosses below the ATR trailing
stop line.
 Exit your short position (buy) when price crosses above the ATR trailing
stop line.
While not conventional, they can also be used to signal entries — in conjunction with
a trend filter.

ATR Trailing Stops Setup

Typical ATR time periods used vary between 5 and 21 days. Wilder originally
suggested using 7 days, short-term traders use 5, and longer term traders 21
days. Multiples between 2.5 and 3.5 x ATR are normally applied for trailing stops,
with lower multiples more prone to whipsaws.

The default is set as 3 x 21-Day ATR.

ATR Trailing Stops Evaluation

Average True Range Trailing stops are far more volatile than stops based on moving
averages and are prone to whipsaw you in and out of positions except where there is
a strong trend. That is why it is important to use a trend filter. Average True Range
Trailing stops are more adaptive to varying market conditions than Percentage Trailing
Stops, but achieve similar results when applied to stocks that have been filtered for a
strong trend.

Original ATR and Volatility Stops have two major weaknesses:

 Stops move downwards during an up-trend if Average True Range widens. I

am uncomfortable with this: stops should only move in the direction of the
trend.
 The Stop-and-Reverse mechanism assumes that you switch to a short position
when stopped out of a long position, and vice versa. What is just as likely in a
trend following system is that a trader is stopped out early — and their next
entry is in the same direction as their previous trade.

We have introduced a ratchet mechanism (described above) to address the first

weakness. The second can be dealt with by using ATR Bands.

Title Description

Welles Wilder's True Range adjusts the normal High - Low daily range
True Range
when there is an opening gap.

Average True Range are used to measure commitment. Expanding

Average
ranges signal increased eagerness and contracting ranges, a loss of
True Range
enthusiasm.

Average True Range (ATR) Bands are used to signal exits in a similar
ATR Bands fashion to ATR Trailing stops, but without the stop-and-reverse (SAR)
of trailing stops.

Twiggs Twiggs Volatility is a proprietary volatility indicator used to flag elevated

Volatility market risk.

How Average True Range (ATR) Can Improve Your Trading

Use this volatility measure to improve order placement and market analysis.

BY CORY MITCHELL

Updated November 20, 2019

Average true range (ATR) is a volatility indicator that shows how much an asset moves,
on average, during a given time frame. The indicator can help day traders confirm
when they might want to initiate a trade, and it can be used to determine the
placement of a stop loss order.

Examining the ATR Indicator

The ATR indicator moves up and down as price moves in an asset become larger or
smaller. A new ATR reading is calculated as each time period passes. On a one-minute
chart, a new ATR reading is calculated every minute. On a daily chart, a new ATR is
calculated every day. All these readings are plotted to form a continuous line, so traders
can see how volatility has changed over time.

To calculate the ATR by hand, you must first calculate a series of true ranges (TRs). The
TR for a given trading period is the greatest of the following:

Current high minus the previous close

Current low minus the previous close

Current high minus the current low

Whether the number is positive or negative doesn't matter. The highest absolute value
is used in the calculation.

The values are recorded for each period, and then an average is taken. Typically, the
number of periods used in the calculation is 14.

J. Welles Wilder, Jr., who developed the ATR, used the following formula for subsequent
periods—after the initial 14-period ATR was completed—to smooth out the data:

Current ATR = [(Prior ATR x 13) + Current TR] / 14

How ATR Can Aid in Trading Decisions

ATR used to filter trades

TradingView.com

Day traders can use information on how much an asset typically moves in a certain
period for plotting profit targets and determining whether a trade should be attempted.

Assume a stock moves $1 a day, on average. There is no significant news out, but the
stock is already up $1.20 on the day. The trading range (high minus low) is 1.35. The
price has already moved 35% more than the average, and now you're getting a buy
signal from a strategy. While the buy signal may be valid, since the price has already
moved significantly more than average, betting that the price will continue to go up and
expand the range even further may not be a prudent decision. The trade goes against
the odds.

Since the price is already up substantially and has moved more than the average, the
price is more likely to fall, staying within the price range already established. While
buying once the price is near the top of the daily range—and the range is well beyond
average—isn't prudent, selling or shorting is probably the better choice, assuming a
valid sell signal occurs.

Entries and exits should not be based on the ATR alone. The ATR is a tool that is used in
conjunction with a strategy to help filter trades. For example, in the situation above, you
shouldn't sell or short simply because the price has moved up and the daily range is
larger than usual. Only if a valid sell signal occurs, based on your particular strategy,
would the ATR help confirm the trade.

The opposite could also occur if the price drops and is trading near the low of the day
and the price range for the day is larger than usual. In this case, if a strategy produces a
sell signal, you should ignore it or take it with extreme caution. While the price may
continue to fall, it is against the odds. More likely the price will move up and stay
between the daily high and low already established. Look for a buy signal based on your
strategy.

You should review historical ATR readings as well. Even though the stock may be trading
beyond the current ATR, based on history, the movement may be quite normal.

Day Trading ATR Tendencies

ATR and volatility often decline throughout the day

TradingView.com

If you're using the ATR on an intraday chart, such as a one- or five-minute, the ATR will
spike higher right after the market opens. For stocks, when the major U.S. exchanges
open at 9:30 a.m., the ATR moves up during the first minute. That's because the open is
the most volatile time of day, and the ATR indicates that volatility is higher than it was at
yesterday's close.

After the spike at the open, the ATR typically spends most of the day declining. The
oscillations in the ATR indicator throughout the day don't provide much information
except for how much the price is moving on average each minute. In the same way the
daily ATR was used to see how much an asset moves in a day, day traders can use the
one-minute ATR to estimate how much the price could move in five or 10 minutes. It
may help establish profit targets or stop loss orders.
If the ATR on the one-minute chart is 0.03, then the price is moving about 3 cents per
minute. If you're forecasting the price will rise and you buy, you can expect the price is
likely to take at least five minutes to rally 15 cents.

This type of analysis aids in formulating expectations about what is likely or unlikely to
occur. Traders sometimes think that as soon as they enter a trade, the price will
magically surge to their profit target. Studying the ATR shows the real movement
tendencies of the price. Take your expected profit, divide it by the ATR, and that is
typically the minimum number of minutes it will take for the price to reach the profit
target.

The ATR changes and often declines throughout the day, but it still provides a good
estimate of how far you can expect the price to move and how long it could take.

ATR Trailing Stop Loss

using ATR in day trading

pidjoe/Getty Images

A trailing stop loss is a way to exit a trade if the asset price moves against you but also
enables you to move the exit point if the price is moving in your favor. The ATR is
commonly used to help day traders figure out where to put their trailing stop loss.

At the time of a trade, look at the current ATR reading. A rule of thumb is to multiply the
ATR by two to determine a reasonable stop loss point. So if you're buying a stock, you
might place a stop loss at 2 x ATR below the entry price. If you're shorting a stock, you
would place a stop loss at 2 x ATR above the entry price.

If you're long and the price moves favorably, continue to move the stop loss to 2 x ATR
below the price. In this scenario, the stop loss only ever moves up, not down. Once it is
moved up, it stays there until it can be moved up again or the trade is closed as a result
of the price dropping to hit the trailing stop loss level. The same process works for short
trades, only in that case, the stop loss only ever moves down.

For example, a long trade is taken at $10, and the ATR is 0.10. You would place a stop
loss at $9.80. The price rises to $10.20, and the ATR remains at 0.10. The stop loss is
now moved up to $10, which is 2 x ATR below the current price. When the price moves
up to $10.50, the stop loss moves up to $10.30, locking in at least a 30 cent profit on the
trade.

Using an ATR Trailing Stop Indicator for Spotting Trends and Reversals

The Average True Range Trailing Stop indicator is great for traders who need help
spotting the trend, or need an indicator that can help them choose in which direction to
place trades. The indicator also points out pullbacks that are strong enough to warn that
the current trend may be in danger.

Average True Range (ATR)

Average True Range is a volatility measure which assigns a value based on the high of a
price bar minus the low, or the high or low minus the previous close, whichever value is
greater. This volatility is then averaged over a number of periods (price bars), such as 12
or 22 price bars.

The ATR is calculated as a price, so a reading of 0.5 means $0.50. It means that on
average the price is moving about $0.50 each price bar. In forex the ATR will be
measured in pips, so a reading of 21 means the price is moving about 21 pips, on
average each, price bar.

ATR is a running calculation which means the indicator will continually produce new
values based on new information. For more on ATR, see: Two Powerful Indicators and
How I Use Them.

Average True Range Trailing Stop

Applying the ATR Trailing Stop to your chart creates a line which is either above or
below the price.

When the indicator is above the price it signals the trend is down, and if the price moves
above the line the trend may be in danger of reversing.

When the indicator is below the price it indicates the trend is up, and if the price moves
below the line the trend may be in danger of reversing.

Figure 1 shows the ATR applied to a 3-minute chart of Apple (AAPL) stock.

fig1

Once morning volatility subsided the price moved out of a brief uptrend and into an
extended downtrend. When the downtrend began the indicator flipped on top of the
price and stayed there throughout the entire decline.

This could have provided confirmation to traders that taking short position, or buying
puts, was the ideal play.

Just after 13 (1:00), the price breaks above the ATR Trailing Stop, and sets in motion a
potential uptrend. The price didn’t actually enter an uptrend, rather it moved sideways,
yet the indicator would have warned traders that the downtrend was no longer in
effect.
This is actually isn’t a trend-change indicator though. When the indicator “flips” all it
means is that a larger than usual pullback has occurred. Sometimes, that means a trend
change, other times not. Price analysis is also need to confirm trend changes. This
indicator simply warns you that a larger than average pullback has occurred, and some
caution is warranted.

Settings

The indicator in figure 1 is taking a 22-period moving average, and then multiplying it by
3. Therefore, behind the scenes, the indicator is calculating the current 22-period ATR,
multiplying it by 3, and then adding it to the current price in the case of a downtrend, or
subtracting it in the case of a downtrend. This is what creates the separation between
the line and the current price.

Decreasing the settings will make it more sensitive to trend changes, but potentially
false signals as well.

Increasing the settings will make the indicator less prone to false signals, but will be
more delayed in spotting potential trend changes.

Pitfalls

The indicator works best in trending markets. When the price action is choppy, the
indicator will flip-flop above and below the price, not providing a lot of useful data.

The indicator is based on the closing prices of bars. Therefore, ideally if using the
indicator you will need to wait for price bars to close before acting on any information
the indicator may provide. Figure 2 shows a choppier day in Apple stock. Notice in the
oval how the price breaks below the ATR Trailing Stop line on several occasions, but
since the bars don’t close below the line, the uptrend remains intact.

fig2

Another pitfall, which is not the indicator’s fault, is that it is not as common as some
other indicators, and therefore may not be available on all charting sites or platforms.

Final Word

The ATR Trailing Stop indictor can help you trade in the direction of a trend. If it helps
you, use it as a guide while you trade. For providing specific entry signals it isn’t ideal,
rather it provides confirmation of the trend. When the indicator “flips” from uptrend to
downtrend (or vice versa), use price analysis to determine if there is an actual trend
change, if it was just a deep pullback or if the price is moving sideways.
Conclusion

The ATR Trailing Stops indicator is very price sensitive and creates
whipsaws during the range-bound market. During that time the position
can be stopped out early. To prevent early exits, this indicator can be used
in conjunction with other indicators. We suggest using the ADX/DMS
indicator as a supporting indicator. The ADX can measure the trend
strength. If it is a strong trend, traders can use the ATR Trailing Stops
indicator for entry and exit. On the other hand, if ADX shows a range-
bound market we suggest not to use this indicator as traders can lose
money both ways then.

KNOWING WHERE TO SET YOUR TRAILING

STOPS IS CRITICAL
One of the most frequently asked questions from active traders is where
do I set my CFD or Forex trailing stop loss?
This can make the difference between exiting a trade too soon or holding
until the end of the trend. It can dramatically affect the profitability of your
trading. To determine when to get out of a trade, studying past
performance can be a useful guide to determining the next exit point.

USING A TRAILING STOP WHEN IN OPEN PROFIT IS A

POWERFUL STRATEGY

Using a CFD or Forex trailing stop loss is an excellent exit strategy.

However, determining the level of the stop loss is critical to your trading
success.

A share typically has a set volatility and the stop needs to be placed far
enough away to avoid the market “noise”. But at the same time, close
enough to exit in the event of a change in trend.

Every market you trade will require a different percentage value as the
noise varies from share to share.

SHOULD YOU USE A TIGHT TRAILING STOP OR A WIDER

TRAILING STOP?

A tight CFD trailing stop loss will result in a trader holding a share for a
shorter timeframe than using a wide trailing stop loss.

We've got three different percent trailing stops below, ranging from 3
percent to 7 percent. These figures are hanging from the highest low. As
you can see, the trailing stop loss does not move down.

You can see in the first chart, Computershare (ASX:CPU) is the stock we
are sampling this trailing stop.

The first chart highlights a 3 percent trailing stop. You can see a few touch
points intraday as well as a few days where the price closes below.
 Let's take a look at a 5 percent trailing stop loss hanging from the highest
low value. As you can see, the price broke through on an intraday basis as
well as closed below twice.

Using a wider stop loss of 7% hanging from the highest low,

Computershare (ASX:CPU) is held for the entire period. The effect of a
wider stop loss is to keep you in a share for longer periods of time allowing
profits to accumulate when the stock is trending.

So which is the best percent trailing stoploss? It has to be better than a

traditional stop loss too.

If you are looking for a strategy that can hold a position through some
reasonable pullbacks and keep you in, 7 percent for CPU is a good figure.

But keep in mind, you will need to backtest all ranges and see how it fits in
with your time frame, temperament and willingness to give back your open
profits.

WHAT ABOUT A TRAILING STOP ON SHORT POSITIONS?

No matter if you are trading long or have a handful of short trades open,
you can run a trailing value, such as an ATR, to help you lock in profits.

You can set the stop level, set the value and as the price continues to
drop you can move your stop with it.

Either the price reached will hit your profit target or your stop price will be
hit. Once it hits your stop, the position will be closed.

BACKTESTING TO FIND THE PERFECT TRAILING STOP

LOSS STRATEGY

One way to determine the appropriate stop loss for a share is to apply the
stop loss to the share before you buy it. Determine what percentage has
worked in the past and then apply that percentage going forward.

This can be done by trial and error. You can use your charting software
and apply the stop loss to the share with different percentage levels.
Pretty much exactly like we have done above on Computershare.

Once you have found the level that is appropriate for the share historically
and holds you in the share for the timeframe you are trading, use this
percentage value or trail amount going forward.

As a guideline:

 short-term traders holding shares from a few days to weeks will use a stop
loss in the range 3 – 8%.
 Medium term traders that hold a share for weeks to months will use a stop
loss in the range 6 – 10%
 Investors that wish to hold shares for months to years can either use a
weekly or monthly stop loss with the above percentages. Or a stop loss
recalculated daily in the range of 10 – 15%.

ATR TRAILING STOP STRATEGY

The most popular trailing stop loss strategy is the ATR Trailing stop
strategy.

ATR stands for Average True Range.

The AverageThe true range on any day is the difference between the high
and the low of the day plus any opening gap that may occur.

Fortunately, every CFD or Forex trading platform has the ATR indicator
built in. So you don't have to do any manual calculations. But it is always
great to know how indicators are calculated.

In basic terms, the ATR indicator tells us how much a stock, CFD, FX pair,
index or commodity is moving on a daily basis. So how volatile is this
instrument?

MOST COMMON USE FOR THE ATR

You have likely heard about ‘time and price'. It means the market you are
trading is likely going through a big price movement up or down. Or a big-
time movement. A time movement means it is tracking sideways for a
large period of time.

Often, a large time movement (going sideways) follows a big price

movement.

As a result, people use the ATR to get clear on how much the market is
moving each day.

When you see a large price movement of three times the average daily
range (ATR), you know this is an extreme move.

But if the market you are trading moves 1 ATR, then all is running normal,
or average.

THE ATR TRAILING STOP LOSS IS THE BEST BECAUSE IT

IS BASED ON VOLATILITY

Many traders are after the best trailing stop loss. The beauty of using the
ATR is that it is based on the volatility of the market you are trading.

No matter if you are trading indices, forex, share CFDs or commodities,

every instrument has its own current ATR reading.
This means you will base your trailing stop loss on how active the market
is moving. This is why the ATR is considered the best trailing stop loss.

AVOIDING GETTING STOPPED OUT TOO EARLY

One of the most frustrating things about running winning positions is

getting stopped out and watching it continue to move in your favour. Argh.

So frustrating.

Using an ATR trailing stop is one of the best ways to avoid getting stopped
out prematurely.

Consider this. You are trading the EURUSD and the average daily range
(ATR) is 70 pips (as of June 2017). This means it is moving on average 70
pips.

If you place your stop loss 2 ATR away, or 140 pips, you would expect
things to track along normally.

But what if, during your successful trade, the ATR for the EURUSD jumps
to 140 pips as it did on the 15th of December 2016.

Your stop loss is now within 1 average daily movement. Which means
your chance of getting stopped out is close to 85-90%.

THE BEAUTY OF THE ATR TRAILING STOP LOSS

When you are on a winning trade and the market you are trading doubles
in volatility, the best way to ride it is via the ATR trailing stop loss.

This is the exact reason why the ATR trailing stop is considered the best
overall trailing stop loss strategy.

ATR trailing stop example

Let's take a look at several examples of using the ATR on a famous
Australian stock, Qantas. The reason we are choosing Qantas is that it
has been in an excellent uptrend, highlighting the best possible angle for a
trailing stop loss.

We'll run through several different ATR trailing stop values so you can see
the impact it has on the stop loss.

1 ATR(10) hanging from the low

1.5 ATR(10) hanging from the low

2 ATR(10) hanging from the low

2.5(10) ATR hanging from the low

3 ATR(10) hanging from the low

3.5 ATR(10) hanging from the low

SO WHICH ATR VALUE IS BEST FOR YOUR TRAILING

STOP?

Well, there are inconclusive results and there are inconclusive results.

There are way too many biased conditions for this test to draw any
conclusions. Except to say that in hindsight, if you find a strong up
trending stock, the best value ATR trailing stop is the largest one.

Every strategy looks fantastic when you use hindsight, so please

understand that we are not concluding any value is better or worse.

The right value comes down to your trading time frame, your backtested
strategy results and what you feel comfortable with.

The calculation of the stop loss is important to ensure you are not sold out
too early. It will also allow you to hold the share to reach your profit levels.

The level of the stop loss you choose is determined by the timeframe that
you wish to hold the share. The longer the timeframe, the wider the stop
loss. No matter which one you use, it will help with your risk management.
It should also be helpful for that actively trading who are currently using a
regular stop loss.

Determining what has worked well in the past will give an indication of the
appropriate level for you stop loss.
ATR Trailing Stop

ATR Stop for NT8

The average true range (ATR) was introduced by Welles Wilder in his book, “New
Concepts in Technical Trading Systems.” This indicator applies the ATR as a trailing stop
and includes a modified version suggested by Sylvain Vervoort in his article “Average
True Range Trailing Stops” (Stocks & Commodities V. 27:6 (34-40)).

Indicator Description

The ATR Trailing Stop indicator applies the Average True Range (ATR) in order to
establish dynamic risk levels. Specifically, the ATR stop indicator is a measure of
volatility, disclosing the following as defined by the lookback period:

ATR Multiplier:

Because the ATR responds to volatility, the indicator will highlight possible trend
changes. The indicator may therefore also be used for stop and reverse systems.
However, the ATR stop indicator is primarily suitable for defining exits, not entries.
When using the ATR average as a measure for stop loss purposes, you’ll want to use a
multiplication factor. We’ve set the default value to 3.5 as it allows us to accommodate
more volatile instruments.

ATR Calculations:

The modified ATR trailing stop introduced by Vervoort, limits extreme price changes of a
single bar. Specifically, a maximum of 1.5 the ATR moving average of the high minus low
prices, is permitted. Furthermore, the absolute value of the current high minus the
previous close, may be distorted by large gaps between the previous high and current
low. Vervoort therefore limits the influence of such gaps by taking into account just
half the size of the gap.

Of course, the absolute value of the current low minus the previous close may also be
distorted in large gaps between the previous low and the current high. Therefore, only
half of the size of such gaps are taken into account too. As for the price difference
between the current high and low value, if the price stays within 1.5 times the ATR
moving average, the modified formula will calculate the difference between the high
and low. However, if the current value of the high price minus the low move beyond 1.5
of the ATR moving average, the formula will limit the value to 1.5 times the moving
average of the current high minus low price. The modified ATR therefore responds to
extended periods of high-volatility, whereas high-volatility events, such as news
releases, will only affect the stop level to a moderate degree.

We could only detect a minor difference between the standard ATR calculation, and the
modified ATR version suggested by Vervoort. The LizardIndicators ATR trailing stop
indicator has the option to activate the modified ATR calculation and the multiplication
factor can be set according to your risk preference via the dialogue box.

ATR Trend:
The ATR stop indicator applies a trend logic, where the paint-pars display blue colors
during an uptrend, and red during a downtrend. By setting the indicator to reverse
intrabar, the indicator will factor high and low levels that occur intrabar, instead of
waiting to see whether the close of the bar breaks above or below the stop line.

Other Library Indicators

Other than the ATR Trailing Stop the following indicators are available from the trailing
stop loss category: Chande Kroll Stop, Chandelier Stop, Deviation Stop, HiLo Activator,
SuperTrend M11, SuperTrend U11 and the Wilders Volatility Stop

The indicator is available for NinjaTrader 8 and was discussed in detail in a blog post on
the ATR Trailing Stop. The Indicator Spotlight also discussed the Wilder Volatility Stop.

Download

ForexTraining Group

How to Use Average True Range (ATR) Indicator for Optimal Results

FOREX TRADING ARTICLES

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There are several different class of indicators that a trader can utilize. And based on the
specific goal, such indicators can help in the overall decision-making process. Most
traders are familiar with momentum based indicators such as RSI and Stochastics.

But there are also other types of indicators that are based on volume, volatility, cycles,
or some other measure. In this lesson, we will discuss a specific trading indicator that
measures the volatility of a currency pair. It is called the Average True Range indicator,
commonly referred to as ATR.

Download the short printable PDF version summarizing the key points of this
lesson….Click Here to Download

What is the ATR Volatility Indicator?

The Average True Range is a single line indicator that measures volatility. The indicator
was originally developed by J. Welles Wilder to measure the volatility of commodities
within the futures market. ATR does not measure price trends or price direction like
other common indicators like the MACD or the Momentum indicator. Instead, the ATR
indicator simply shows when volatility is high and when it is low.

ATR Indicator

This is an enlarged view of the ATR Indicator, which is usually attached in a separate
window to the bottom of your chart. The single line of the ATR indicator fluctuates
within a range. High prints of the ATR line indicate that the market is experiencing high
price volatility. On the other hand, depressed ATR levels imply that the price volatility
within the market is relatively low.

Traders can use the prints of the ATR line to consider entry and exit points based on
price volatility. When volatility is high, Forex pairs are likely to be dynamic and faster
moving. In contrast, low volatility is associated with a quiet market or consolidation
period.

Although the ATR indicator is not as widely used by retail traders as some other
momentum based indicators, it serves an important purpose for volatility conscious
traders who are interested in gauging the current level of volatility or trying to
anticipate potential price breakouts. Experienced traders are aware that markets move
from periods of low volatility to high volatility and back again constantly. As such, the
ATR is an invaluable trading tool for those that can appreciate this ebb and flow within
the market.

Average True Range Calculation

To calculate the Average True Range, you will first need to identify the True Range of
the period on the chart.

To discover the True Range on the chart, you should do three calculations and take the
one that gives the highest value:

(High of the Current Period) – (Low of the Current Period)

(Current Period High Absolute Value) – (Close of Previous Period)

(Current Period Low Absolute Value) – (Close of Previous Period)

The highest result from these three formulas gives you the actual True Range on the
chart. When you get the True Range, you should simply average the values for the
period on the chart. The average calculation is done using an Exponential Moving
Average on the values.

Fortunately, most trading platforms offer the ATR indicator as a tool and will calculate
these values automatically. So, it is not necessary to do all these calculations yourself,
however, it is important to understand how the indicator is composed so you can use it
most effectively. The default Average True Range formula uses a 14-period EMA
indicator. However, you can manually adjust the period taken into consideration. The
indicator then recalculates based on the new input.

ATR Volatility Analysis

As we touched upon earlier, the ATR indicator can be used to perform volatility analysis
on the chart. The Average True Range tells you when volatility is high and when it is low.
One of the best applications of the ATR volatility indicator is that it can help you to place
your stop loss order in a manner which is consistent with current market conditions.
Basically, it will help you to avoid placing stops too tight during high volatility periods
and placing stops to wide in low volatility periods.

In addition, it can assist you in setting higher probability take profit points. For example,
If the ATR has a relatively high reading, you might consider staying in the trade for a
bigger target on the expectation that the increased volatility can lead to a larger
favorable price move.

Average-True-Range-Indicator

In the example above you see the EUR/USD chart for February 2016 – February 2017
with an ATR indicator attached at the bottom. The red arrows on the ATR indicator point
to times when the values are relatively high, which is associated with high price
volatility. Notice, the large volatile candles on the upper price chart at these
corresponding times.

Contrary to this, when the ATR readings are low, the market is relatively quiet as it has
entered a period of low volatility. Candles are small, price action is calm, and the
EUR/USD is consolidating rather than moving directionally. When the volatility is low,
you can adjust your Stop Loss orders tighter. At the same time, your targets should be
smaller as well, since the price is not expected to move much.

The ATR indicator can also be used to project future tendencies. If you notice that the
ATR line is steadily trending upwards, then you can assume that volatility is likely to
remain high. And for a steady down sloping ATR, we can expect continued range-bound
type environment in the near future. At the same time, you should be on the lookout for
a transition from low to high volatility or high to low volatility to prepare you for a
change in market condition.

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MT4 ATR Indicator

The ATR indicator is built into the MetaTrader 4 trading platform – the most commonly
used Forex trading terminal. To activate the MT4 ATR indicator you should simply go to
Insert > Indicators and choose Average True Range. The indicator then attaches to your
chart with its default average setting – 14-period Exponential Moving Average.

If you want to change this setting, you should simply drag the mouse cursor to the
indicator at the bottom of your chart and click the right mouse button. Then you would
choose “ATR(14) Properties…”, which will bring up the following pop-up window:
Parameters-of-ATR-in-Forex-Trading.

Then under the “Parameters” tab, you will see a field named “Period.” Simply change
the default “14” value to your preferred setting. The new settings of the MT4 ATR
indicator will be applied automatically.

Practical Application of Average True Range

Since ATR is primarily a price volatility study, it cannot be used as a standalone tool for
trading the market. You will use it in combination with your trading methodology to fine
tune your entry, stop loss placement, and profit target.

One of the most effective ATR strategies is one that includes price action analysis and a
Trailing Stop Loss order based on an ATR value. You can use price action patterns as
entry signals on the chart. These could be chart patterns, candle patterns, trend lines,
trend channels, etc.

Stop Loss Placement

One you have entered into a trade, you can use an ATR based trailing stop. The point is
to use the value from the Average True Range indicator to determine the distance you
want to trail the price. When the price action moves in your favor afterward, the stop
loss will also move along with price taking into account the distance you have set from
the current price.

But, if the price action moves contrary to your trade, the ATR Trailing Stop will stay still.
As such, an ATR trailing stop will help provide for a looser stop as prices moves in the
direction of your trade, allowing you to extract the maximum amount from the market
when there is a persistent trend.

There is a simple rule to determine a Stop Loss within an ATR trade management
approach. If the ATR indicator line is in the upper half of the area, you can consider the
currency pair as relatively volatile, putting a looser Stop Loss order in the market. If the
ATR is giving a value that is located in the lower half of the indicator, then you can use a
tighter Stop Loss order, since the price is relatively less volatile than normal.

Setting a Target

Now we will discuss some simple guidelines for managing your exit using the ATR
indictor. If the ATR line is in the upper half of the indicator during your trade, you can
consider multiplying the minimum potential of your pattern by 2. This means that you
can try and hit a target twice the usual for the pattern. You may want to use a scale out
method when doing this or decide to exit the full position at the bigger target.

On the other hand, if the ATR line is in the lower half of the indicator, then you may
want to only target the minimum potential of the pattern. The same idea is in force if
the ATR line is steadily trending upward or downward. If you enter a trade where the
ATR is in the lower half, but the line is trending upward, you can still consider the double
target option on the chart.

Let’s say the price breaks a triangle pattern in the bullish direction. As a result, you
decide to buy the respective Forex pair on the assumption that the price is increasing.
The triangle pattern rules state that you should stay in the market for a minimum price
move equal to the size of the pattern. However, if the ATR is giving you high values at
this time, you may consider staying in the trade for a price move equal to twice the size
of the triangle target. As an option you could exit half your position on the original
target and close the other half at the second target.

In some cases, the patterns or trade setups may not have a calculated target. This is
when the ATR Trailing Stop comes into play. With this, you would simply hold the trade
as the price is trending in your favor and exit when the Trailing Stop Loss order gets hit.

Example of Trading with ATR and Price Action

Now let’s take a look at an ATR based trade management strategy in action.

ATR-Trading-Strategy-with-Price-Action

We are now looking at the H1 chart of the GBP/USD Forex pair for July 5-14, 2016. The
image shows an example of an ATR trading strategy where a long trade is opened when
a bullish breakout occurs through the upper level of a range. Notice that we have
marked the middle level of the ATR indicator at 0.0039 in order to bisect the upper and
the lower part of the indicator.

The blue horizontal lines on the price chart mark the range of the GBP/USD. The blue
horizontal line in the ATR area shows the ATR line at the middle level.

Notice that the ATR line breaks the middle level and shifts into the upper half of the
indicator. However, the price is still located in the horizontal channel. Later, the price
breaks the range through the upper level, giving us a long signal. The ATR line is in the
lower half of the indicator at this moment. Therefore, you could buy the GBP/USD with
the initial idea that you will pursue the minimum target of the pattern equal to the size
of the range.

But on the way up we see that the ATR line starts trending upward. At the same time,
we see that the line moves in the upper half of the indicator a few times. This gives
sufficient reason to believe that the GBP/USD volatility is increasing. Therefore, you
have the option to extend your target by using the x2 rule. You should also adjust your
ATR Trailing Stop Loss as shown on the image.

Then you could hold the trade until the price reaches 2x the size of the range, shown
with the two magenta lines.
The first red arrow indicates the distance between the adjusted Trailing Stop and the
entry price. The GBP/USD price decreases by this level right after the 2x target is
reached on the chart. The second arrow you see at the end of the chart shows the
moment when the price would have hit the ATR Trailing Stop if you had not already
closed the trade.

Let’s see the power of the ATR Trailing Stop with another example.

ATR-Trailing-Stop-Trade

This time we have the H4 chart of the EUR/USD for May – June 2015 where we give an
example of a closed trade using the ATR Trailing Stop.

The chart begins with a bearish channel. Suddenly, the price of the EUR/USD breaks the
bearish channel through the upper level during relatively low ATR prints. You could buy
the EUR/USD at this moment, placing a Trailing Stop Loss order under the previous
bottom on the chart as shown on the image – about 90 pips distance.

The price tests the already broken upper channel level and bounces upward on sharply
increasing ATR values. As such you could adjust the distance of your Trailing Stop to
contain the volatile price action in a better way. You could measure the distance
between the breakout point and the low of the previous bearish channel and apply the
parameter as a new pip distance for your Trailing Stop Loss – about 140 pips.

The price action creates a couple of strong bullish impulses before hitting the Trailing
Stop. See that after the first impulse the price creates a correction that nearly hits the
Trailing Stop (red arrows). However, the Stop Loss order is well positioned, and it
sustains the pressure. If you haven’t adjusted the distance of the Trailing Stop on the
volatility increase, the Stop would have been hit, putting you in a position to likely miss
the next sharp impulse. After the second impulse, the price action starts a general
consolidation where the Trailing Stop eventually gets hit.

This is a channel breakout trade which has no specific target rules. This is when the
Trailing Stop comes in most handy. Also, there are cases when you want to scale out
rather than go for the full target, which is another case when the Trailing Stop can be
useful. Just don’t forget to loosen and tighten the ATR Trailing Stop based on values
shown on the ATR indicator.

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Conclusion

ATR stands for Average True Range. It was developed by a famous technical analyst
named J. Welles Wilder

The ATR is an indicator that measures price volatility, originally designed for commodity
trading.
High ATR values indicate high volatility. Low ATR values imply that volatility is relatively
low.

The indicator consists of a single line that fluctuates around a range.

The ATR Calculation is as follows:

The Average True Range formula involves the initial calculation of the True Range on the
chart, where you should take the highest value of these three formulas:

(High of the Current Period) – (Low of the Current Period)

(Current Period High Absolute Value) – (Close of Previous Period)

(Current Period Low Absolute Value) – (Close of Previous Period)

Then you plot an Exponential Moving Average to get the Average True Range.

Using ATR in trade management allows you to set better Stop Loss orders and targets:

When ATR indicator is high, volatility is high:

Set looser Stop Loss orders.

Set bigger targets.

When ATR indicator is low, volatility is low:

Set tighter Stop Loss orders.

Set smaller targets.

You can find a built in ATR indicator in the MetaTrader4 platform:

Insert>Indicators>Average True Range

The default ATR value takes into consideration a 14 period EMA. To change the value of
the MT4 ATR indicator you should:

Right-click the indicator at the bottom of your chart.

Choose “ATR(14) Properties…”

Click on “”

In the “Period” field replace the default “14” by the period you want to include.

An ATR strategy could combine price action analysis and a Trailing Stop:

Open trades based on price action events or patterns.

Set a tight Trailing Stop if the ATR shows lower values. Set a loose Trailing Stop if the
ATR shows higher values.

If a chart pattern has a certain target:

On lower ATR values hold the trade until the minimum pattern potential is acheived.

On higher ATR values hold the trade for 2x the minimum pattern potential and consider
scaling out half at 1X target and half at 2X target.

If the pattern has no specific target rules:

Hold the trade until the Trailing Stop is hit.

Note that the Trailing Stop based on an ATR value could be adjusted periodically as
needed based on market conditions.

Using the ATR Stops Indicator For Exiting Trades

Posted on May 23, 2019 by Cory Mitchell, CMT

If you get frustrated by a winning trade turning into a loser, or getting out of a winning
trade only to have it continue moving in your favor for an even bigger gain, a trailing
stop loss may help. While there is no perfect solution in the trading world—we will
hardly ever exit a trade at exactly the perfect time—at least a trailing stop loss can help
keep us in a trade while it’s working and get us out when it isn’t.

One of my favorite trailing stop loss techniques it is to apply an Average True Range
Stops, or ATR Stops, indicator to my chart. Not only does it help identify trend direction,
but it is also useful for signaling when to get out of a trade.

True range is how much the price moves within a price bar/candle. Average true range
(ATR) is an average of how much the price is moving on each bar. I use a 6-period
average for my ATR Stops indicator, although you may find something else works better
for you. The ATR then has a multiplier applied to it, such as 2, 2.5, or 3. When the price
is moving up, the ATR Stops will be the ATR x multiplier below the price. When the price
is moving down, the ATR Stops will be the ATR x multiplier above the price.

The following chart shows a 6-period ATR Stops with a 3 multiplier on Apple (AAPL)
stock.

atr stops applied to stock chart

The multiplier determines how tight the indicator is to the price. A larger multiplier is
better for someone holding longer-term trades, while a smaller multiplier is better for
someone who wants to get in and out more often, or only wants to ride one price wave
and then get out as soon as a significant move in the opposite direction occurs.

Setting the Multiplier

Before each trade, I determine the best settings for the trade I am taking. I do this by
adjusting the ATR Stops multiplier to match what the stock has done in the past. Some
stocks are more volatile and tend to whipsaw across the indicator. In this case, a bigger
multiplier may be needed. If the stock moves smoothly, a lower multiplier will likely
work better.

Since I am a trend trader, and typically only get involved when a strong trend is in play,
I don’t care if the price whipsaws across the indicator while the price action is choppy.
This will happen. I just want the indicator to track the price nicely when it is trending.
Not too close that it gets touched on tiny price moves in the opposite direction, but also
not so far that the price has to move a whole bunch just to reach the indicator.

On the following charts, the top one has a 3x multiplier, while the bottom has a 2x
multiplier. The 3x gives the price a bit more room, while the 2x times tracks it closer. On
the decline from May to August 2018, the 2x would have gotten a trader out earlier than
the 3x. But that isn’t always so bad. During the rally at the start of 2019, the 2x would
have alerted the trader to get out before the 3x did.
atr stops multiplier comparison

Two Ways to Use It For Exits

When it comes to exits, I use two methods. I determine before each trade which one I
will use.

Exit when the price touches the indicator line. For example, get out of a long trade when
the price drops below the rising ATR Stops.

Exit only when the price CLOSES below the ATR Stops on a long trade, or CLOSES above
the ATR Stops on a short trade. Once the close occurs, place a stop loss a few cents
below the low of that candle for a long trade, or a few cents above the high of that
candle for a short trade.

Both methods have their advantages and disadvantages. As mentioned, we don’t have
perfection in trading very often. But what we can have is a method that gets us out of
trades when they start working against us, and that lets our winning trades run. Those
are both keys to successful trading.

By Cory Mitchell