ATR Stop - what is it?

An ATR Stop is the short name for a protective stop that is based on the Average True Range indicator.

What is special about the ATR protective stop?

The concept of a protective stop is well known to system traders. In fact, a complete system requires a way to cut trades that look as if they are destined to be losers and a protective stop is a means of doing this.

The True Range indicator is a measure of market movement and is a method of indicating the amount moved by a market in a day. On the face of it, this appears to be a simple matter of taking the difference between the day’s high and low prices but allowance must be made for ‘gapping’ which frequently occurs between the closing price of one day and the opening price of the following day.

By taking an average of a number of days true range values, a measure of the usual daily movement during a time period can be obtained. This is referred to as an ATR15 when 15 days is the time period.

When an ATR Stop is calculated it is based on a number of days average movement, so a 2ATR stop would be a value which is two ATRs in size. So if the ATR value was, say 20 points, then the 2ATR stop would be valued at 40 points.

An exit from the price at which the trade was entered, could be fixed 2ATRs distant in the ‘losing direction’ to act as a protective stop exit point.

There are different ways of employing stops, according to your trading method but normally ATR values are calculated each day, based on the most recent prices.

 

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