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.

Click here for Back Test Performance of Trailing Stops 

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 covers other aspects of ATRs.   The best description of the Chandelier exit is in Come Into My Trading Room: A Complete Guide to Trading by Alexander Elder.

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.   

Click here for BackTesting Reports on Trailing Stops

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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

I start this blog while immersed in the early phases of my fourth major US stock market backtesting effort. 

The purpose of the blog is to record my key decisions and tactics for backtesting.   I intend it to be a resource for traders and active investors . I hope that others will learn from my efforts and we all learn from each others’ comments and discussion.

My goals for backtesting are:

1. Design trading strategies for my own use.   Specifically, 

• US Stock Market
• both buying long and short selling 
• investigate both trend following and band trading  
• swing trading: end-of-day (EOD) or daily charts and trades that last several weeks  

2. Provide information that other traders can use to develop their own systems.    That includes the areas above, and in addition, I want to illustrate for new traders such key concepts as:

• stop loss orders 
• market orders vs limit orders vs stop entry orders
• trailing stops
• price targets
• indicators like moving average, RSI, MACDH, Stochastic

3. Do this with a scope and scale that goes beyond the resources typically available to private traders, including:

• delisted stocks
• over 15 years of historical data
• clean database
• multiple time periods to avoid curve fitting
• crude and robust strategies only…limited fussing with parameters
• statistically sound methodologies
• monte carlo simulations to generalize beyond the given data

 Let’s dive in!

(Backtesting Blog is an Amazon Associate.)

Tags: backtesting, data, goals, limit order, macdh, market order, rsi, stochastic, stop loss, swing trading