Trailing Stop ATR

Last modified 13:21, 5 Nov 2012

Trailing Stop - Average True Range

Trailing Stop levels are used by traders to determine when to enter or exit a trade.

Trailing Stops can be used to limit losses, or to maximize profits.

A trailing stop is incrementally changed to follow the direction of the current trading price. From the start date, forward until the stop level intersects the price chart, the trailing stop levels will only change in one direction: Upward for Long trades, downward for Short trades.

trailstop.gif

The stop level calculation is performed daily. If the calculated stop level is higher than the previous day's (for a Long market setting), the new level will be plotted on the chart below the current interval. If the stop level is lower than, or the same as, the previous day's level, the result will be discarded and the previous day's level will be continued horizontally to the right.

In the Short stops setting the process is reversed - i.e. stop levels must be less than the previous day's level in order to be plotted.

In this way, the stop levels can only progress either upward (in Long markets), or downward (in Short markets).

The point at which the trailing stop line intersects with the price chart is the exit or entry signal point.

Your SOFTWARE's Trailing Stop - ATR indicator automatically calculates stop levels using the base symbol's daily Average True Ranges.

True Range Calculation

The True Range calculation is the first part of the calculation in the Average True Range indicator.

The True Range is the greatest of either of the following:

  • Today’s High minus Today’s Low, OR
  • The difference between Yesterday’s Close and Today’s High, OR
  • The difference between Yesterday’s Close and Today’s Low

Average True Range Calculation

When the True Range level for each interval is known, the level for each interval can also be averaged over a number of prior days to produce an Average True Range (ATR). The number of intervals to be averaged can be set by the user in the Periods parameter, see next section.

Market Adjustment

Once an ATR level calculation is made, it can also be adjusted by using a multiple. This will multiply the ATR level and then plot the distance from the Add/Subtract point as the stop level.

The adjustment can be varied depending on the volatility of the market, a higher multiple will accommodate greater price fluctuation, but the resulting stop levels will be less precise.

Parameters

The following Trailing Stop calculation variables can be set on the Parameters tabbed page of the Trailing Stops Properties dialog box:

indictrailingstopatrparams.png

Periods

The true range from which the stops levels are calculated is determined internally by the software (see above).

Users can only set whether the True Range or an Average True Range is calculated.

Insert 1 in this text box to use only the True Range for the current interval in the calculation of the stop levels.

Type in any other number to use an Average True Range of the true ranges for that number of previous days.

The resulting figure is referred to in this dialog as the ATR.

Initial Position

Select between Long or Short, depending on what type of trade is contemplated.

The Trailing Stop display will always be plotted below the price chart for long stops, and above the price chart for short stops.

Entry Date

Select a date from which the Trailing Stop indicator will proceed.

Type in the date using the dd/mm/YYYY format or use the convenient drop down calendar selector tool.

Note - For Long trades, the Entry Date must be followed by a price rise on the subsequent day for any plot to be made. Likewise, for Short trades the Entry Date must be followed by a price decline.

Add/Subtract Using

Select the price level that the ATR amount will be added to (for short markets) or subtracted from (for long markets).

If Close is selected the ATR will be added to the Close price and the resulting stop level will be plotted above the price chart in short trades, and will be subtracted from the Close price and plotted below the chart in long trades.

When High/Low is selected the ATR will be added to the High price and plotted for short trades, and will be subtracted from the Low price for long trades.

ATR Multiple

The resulting stop levels can be expanded by a multiple of the user's choice.

This feature is used in volatile markets to move the stop levels further from the price chart thereby avoiding premature triggering of the trailing stop.

Display

As mentioned previously, the Trailing Stop display will always be below the price chart for long stops, and above the price chart for short stops.

The exact display of the plot is controlled on the Plot tabbed page of the Trailing Stops Properties dialog box.

Style

The display Style selected for the plot can be one of the following: Solid, Dashes, Dots, Points, Histogram or Step.

The default setting is a dotted line (Dots). Note that the graphic in this topic (see above) is a Step plot.

Once the style is selected the Color, Weighting and Visibility can also be controlled from this page.

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