The ATR Trailing Stop

ATR Trailing Stop for NT8

This Indicator Spotlight will look at a general trailing stop definition and specifically how it can be applied to Average True Range (ATR). The ATR responds to volatility, highlighting possible trend changes. Therefore, instead of using a fixed tick or percentage of capital as a definition for our stop and trailing method, the current volatility determines the risk. To learn more about the ATR trailing stop indicator , check out this video, or continue reading below:

Definition of a trailing stop:

A trailing stop is a fixed stop price below the market price of the instrument you’re trading, along with a method to trail that stop level, should the market move in your favor. In a long position, the ATR trailing stop will move up together with rising prices, whereas if the market falls, the stop loss price will not change. A market order will then trigger when the stop price is hit.

Accordingly, a limit on the maximum possible loss is set, without limiting the maximum possible gain. The trailing stop orders for short positions are the inverse, the stop will move to the downside together with falling prices.

The Average True Range

Introduced by Welles Wilder in his book, “New Concepts in Technical Trading Systems”. The ATR is an average of the following, as defined by the greatest of:

  • The current high, minus the current low
  • The absolute value of the current high minus the previous close
  • The absolute value of the current low minus the previous close
ATR Calculation
ATR Calculation

Using the ATR Trailing Stop:

Generally, the stop should be placed at a multiple of anywhere between 2 and 4 of the ATR. We’ve set the default value to 3.5 to accommodate for more volatile instruments.

However, because the ATR responds to volatility, the indicator will also highlight possible trend changes. Accordingly, the ATR trailing stop indicator may also be used for stop and reverse systems. For example, a short position could then trigger once the long stop level is hit and vice versa. However, such systems will only be profitable in strongly trending markets.  During sideways and choppy price action they will generally relinquish all the profits (and more).

A more unorthodox approach is using the ATR trailing stop to identify retracements and reversal patterns in the direction of the trend. Positions with a favorable risk reward ratio can then be entered close to the stop level.

ATR Trailing Stop for NT8
ATR Trailing Stop for NinjaTrader 8

Conclusion:

The ATR trailing stop is primarily suitable for defining exits, not entries. Furthermore, the indicator may be used as a trend filter in conjunction with other indicators to define retracement entries in the direction of the trend. Additional trailing stop indicators, such as the Super Trend, Chande Kroll and the Chandelier Stop may be found in the Trailing Stop category of the indicator library.

To download the ATR stop trailing indicator, follow the below link:

The indicator is available for NinjaTrader 8.