Average True Range indicator or ATR is an indicator which shows the historical volatility of stock’s price over a specific period of time. ATR shows the historical range of price movement over a specific time period. ATR Trailing Stops is an extension of ATR where the basic idea of ATR has been used to create trailing stops to help the trader to make better entry/ exits. Zerodha Kite charts plots this indicator for traders.
How to choose ATR trailing stop indicator in Zerodha Kite?
- Go to MarketWatch.
- Choose the stock you are going to trade.
- Right click on the stock and select chart from graphic icons.
- Chart window of the stock opens.
- Go to studies. Select studies.
- Go to ATR Trailing Stops and click on it.
- A small window opens with default parameters of the indicator.
- The default parameters are Multiplier – 3, Period – 21, Plot type – points, HighLow, Buy & Sell stop loss (coloured).
- All these parameters can be customised to suit one’s demand.
- Once the parameters are selected the Done command is chosen, the parameters window goes off the screen and the indicator is plotted on stocks price with buy stop loss in green colour dots and sell stop loss in red colour dots.
- One should exit the current position once the buy/ sell stop loss is taken off.
- Or Enter when the buy stop loss is violated by creating short and exit when the sell stop loss is taken off. One can take fresh buy position at this point maintaining the trailing stops.
ATR trailing stops in intraday –
- The indicator works well in all time frames.
- The picture above shows Reliance stock price movement with ATR trailing stop indicator.
- The chart shows 1 min. timeframe.
- A short position is created when the price goes below buy stop loss.
- The short position is closed when the stock price goes above the sell stop loss.
- A fresh buy position can also be created at this point.
The indicator is very price sensitive and creates whip saws during the high volatility period. During that time the position can be stopped out early. To prevent early exits, this indicator can be used in conjunction with ATR Bands.
Partha, an engineer by education, is theoratically actively following the stock and commodity markets since 1990. He is an active trader since 2003. He has received formal education in future and options and quantum analysis. He is presently working on research oriented projects using Python and data analytics.