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What Is An ATR Trailing Stop?: New Trader U

An ATR trailing stop uses the Average True Range (ATR) technical indicator to determine where to set initial stop losses and trailing stops. The ATR measures volatility over a given period, usually 21 days, and a multiple like 3xATR is used to determine the stop distance from the current price. As the price moves in your favor, the trailing stop follows the price higher or lower depending on the trade direction at a fixed distance set by the ATR. This provides an objective, mechanical way to manage risk and take profits compared to discretionary stops that can be influenced by emotions.

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84 views1 page

What Is An ATR Trailing Stop?: New Trader U

An ATR trailing stop uses the Average True Range (ATR) technical indicator to determine where to set initial stop losses and trailing stops. The ATR measures volatility over a given period, usually 21 days, and a multiple like 3xATR is used to determine the stop distance from the current price. As the price moves in your favor, the trailing stop follows the price higher or lower depending on the trade direction at a fixed distance set by the ATR. This provides an objective, mechanical way to manage risk and take profits compared to discretionary stops that can be influenced by emotions.

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12/11/21, 10:19 AM What is an ATR Trailing Stop?

– New Trader U

Sat. Dec 11th, 2021 10:19:09 AM     





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What is an ATR Trailing Stop? Search

By Steve Burns
 MAY 12, 2020

atr trailing stop, atr trailing stop indicator, average true range

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An ATR trailing stop is one way to manage a trade at both the time of entry as a stop
loss setting and if it evolves into a winning trade by exiting when the price reverses far
enough to trigger a trailing stop exit. 

This type of trailing stop uses the technical indicator of the Average True Range which
is a measure of the magnitude of current price volatility, it is a moving signal and
expands as the trading range grows and contracts as the trading range gets smaller. 

This process is based on the fact that the ATR is a measurement of the average
volatility of the price action in a set time period. This is a mechanical trailing stop and is
quantified taking away the psychological pressure of discretionary decision making
about where to set an initial stop-loss at entry and where to exit a winning trade based
on a trailing stop. 

The Average True Range technical reading is calculated with the daily price range
change and uses the greatest of three possible readings: ‘high minus the previous
close’, ‘previous close minus the low’ or the ‘high minus the low’.  For an ATR trailing
stop the 21-day period average ATR is commonly used. A multiple of 3 is plotted with
the ATR on the chart as a visual trailing stop to use for signaling in most cases. 

In the case of a long position the 3 ATR would be trailing below the price on the chart in
the case of a short position the 3 ATR would be trailing above the price. 

The ATR is a moving indicator and changes with the degree of volatility in price action.
It will be wider range in highly volatile charts and tighter in less volatile charts. A 2 ATR
trailing stop can be used in extremely volatile markets to lower the risk of the distance

to the stop loss or trailing stop. 

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