ATR Trailing Stop

The average true range (ATR) was introduced by Welles Wilder in his book, “New Concepts in Technical Trading Systems.” This indicator applies the ATR as a trailing stop and includes a modified version suggested by Sylvain Vervoort in his article “Average True Range Trailing Stops” (Stocks & Commodities V. 27:6 (34-40)).

Indicator Description

The ATR Trailing Stop indicator applies the Average True Range (ATR) in order to establish dynamic risk levels. Specifically, the ATR is a measure of volatility, disclosing the following as defined by the lookback period:

  • 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

An average of this value is then calculated, creating the Average True Range. Of course, NinjaTrader has a predefined ATR indicator (ATR (period)). However, by using a specific formula, an ATR value based on a different input than the close. For example an average price calculation, can also be applied.

ATR Multiplier:

Because the ATR responds to volatility, the indicator will highlight possible trend changes. The indicator may therefore also be used for stop and reverse systems. However, the ATR trailing stop is primarily suitable for defining exits, not entries. When using the ATR average as a measure for stop loss purposes, you’ll want to use a multiplication factor. We’ve set the default value to 3.5 as it allows us to accommodate more volatile instruments.

ATR Calculations:

The modified ATR trailing stop introduced by Vervoort, limits extreme price changes of a single bar. Specifically, a maximum of 1.5 the ATR moving average of the high minus low prices, is permitted. Furthermore, the absolute value of the current high minus the previous close, may be distorted by large gaps between the previous high and current low. Vervoort therefore limits the influence of such gaps by taking into account just half the size of the gap.

Of course, the absolute value of the current low minus the previous close may also be distorted in large gaps between the previous low and the current high. Therefore, only half of the size of such gaps are taken into account too. As for the price difference between the current high and low value, if the price stays within 1.5 times the ATR moving average, the modified formula will calculate the difference between the high and low. However, if the current value of the high price minus the low move beyond 1.5 of the ATR moving average, the formula will limit the value to 1.5 times the moving average of the current high minus low price. The modified ATR therefore responds to extended periods of high-volatility, whereas high-volatility events, such as news releases, will only affect the stop level to a moderate degree.

We could only detect a minor difference between the standard ATR calculation, and the modified ATR version suggested by Vervoort. The LizardIndicators ATR trailing stop indicator has the option to activate the modified ATR calculation and the multiplication factor can be set according to your risk preference via the dialogue box.

ATR Trend:

The ATR trailing stop indicator applies a trend logic, where the paint-pars display blue colors during an uptrend, and red during a downtrend. By setting the indicator to reverse intrabar, the indicator will factor high and low levels that occur intrabar, instead of waiting to see whether the close of the bar breaks above or below the stop line.

The indicator is available for NinjaTrader 8.