ATR Trailing Stop Definition
November 10th, 2008 by jackieannpatterson | No Comments | Filed in Glossary
The ATR Trailing Stop is one way to limit losses and protect profits. A stop loss order is set a multiple of the Average True Range (ATR) away from the current stock price. As the price moves in the trade’s favor, the stop rachets along with, always calculated from a better closing prices and never from worse closing prices. This mostly keeps from giving ground once its protected by the stop, except in the case of increasing volatility as measured by the ATR.
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Chuck LeBeau popularized the method of trailing a stop loss order a few ATRs below the recent high price for a long trade. This method became known as the Chandelier Stop. LeBeau’s Book
The ATR Trailing Stop is also known as a volatility stop.
Extra Insight:
In backtesting, the ATR Trailing Stop reflects each stock’s unique daily price range. Hence it can fit each stock better than a dollar trailing stop or even a percentage trailing stop.
As with all trailing stops, the ATR trail never exits at the extreme of a movement. Hence it always gives back some of the profits.
The ATR stop amount can be subtracted from either the high, the close, or the low of the day. Each variation gives slightly different results. The important concept is to match the stop distance to the stock’s volatility and to move it along with improving prices.
ATR stops are not offered by brokers, to my knowledge. They are also tedious to calculate by hand. The only realistic way to use an ATR stop is with software support. Programmable software packages such as TradeStation can be programmed to display (and backtest!) an ATR stop.
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Last updated 11/11/08.
Tags: Alexander Elder, ATR, backtesting, chandelier Chuck LeBeau, exit, long, stop, stop loss, strategy, TradeStation, trading, Volatility
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