ATR Trailing Stops Formula, Strategy

Atr trailing stops

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 and few other recent trading platforms plots this indicator for traders.

How to attach the indicator on charts?

Attaching ATR Trailing Stops indicator on Zerodha Kite

atr trailing stops indicator
  • Login to 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).
  • We can customize all these parameters to suit our demand.
  • Once we select the parameters and choose the Done command, the parameters window goes off the screen
  • The indicator is plotted on stocks price with buy stop loss in green colour dots and sell stop loss in red colour dots.
  • But default this indicator will generate a signal when the close price breaches the stop line. But you can change it to High Low mode. In that case, if the high or low of any candle breaches the stop line it will generate a reverse signal.

Attaching ATR Trailing Stops indicator on other terminals

Just like Zerodha Kite, this indicator is available in other terminals like Upstox Pro etc. Watch the image below to understand how we attached the indicator in Upstox platform on the Adani Ports shares price graph. The parameters are just as same as the Zerodha platform.

ATR Trailing Stops Upstox

Plotting the ATR Trailing Stops as Points or Squarewave?

ATR Trailing Stops can be plotted in two ways. Points or Squarewave. The points version will show the stop line as dotted. But the squarewave version will show it as a straight line and the stop will move in a staircase. The above two images show the stop in Points version. Check the image below to know how it looks like in the Squarewave version.

Points or Squarewave

How to trade with ATR Trailing Stops?

Use as buy sell signals

  • The trading strategy with this indicator is the same as the SuperTrend indicator.
  • Buy the stock when the sell stop loss (red line) is taken off and price close above the red line.
  • Similarly, one should exit the current buy position once the buy stop loss or green line is taken off.
  • Enter the short sell when the buy stop loss (green line) is violated and exit short sell when the sell stop loss is taken off.
  • This is a stop and reverse system and one can take fresh buy position at this point maintaining the trailing stops.
  • This system will always keep the trader in a position
ATR trailing stop indicator in Zerodha

Use as support and resistances

The ATR Trailing Stops can also act as strong support and resistance. Many times we have seen price bouncing up or down exactly from the indicator lines. Check the image below.

Use as support and resistance

Common FAQ

How do you calculate ATR trailing stop?

The ATR trailing stop is calculated by multiplying average true range by some pre-defined multiplier. We can optimize the indicator by either changing the value of the ATR or by changing the value of the multiplier. The stop will keep trailing, i.e, it will move up or down with the price.

How do you place a stop loss in ATR?

We can multiply the ATR by some multiplier. As ATR is dynamic, i.e, changes with time and price, the multiplied product will also be dynamic. We can use that multiplied result as a stop loss. As an example, we can multiply 21-period ATR by a multiplier of 3 and that can act as a stop loss.

What is trailing stop loss with example?

The fixed stop does not change with price. But the trailing stop loss will change with price. For example, a trader bought Nifty future at 10800 and he keeps 20 points stop at 10780. Now he decides to raise his stop loss by 10 points, with every 10 points up-move of price. So when the price reaches 10810 the stop moves to 10790. Similarly, when the price moves to 10820, the stop moves to 10800 and so on. If the trailing stop gets hit, that marks an exit from the buy position. This trailing stop loss system has been incorporated in Zerodha bracket orders.

Simple stop and reverse system

  • 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.
  • The indicator creates a stop position when the price goes below buy stop loss.
  • The short position is closed when the stock price goes above the sell stop loss.
  • With the closure of the short position, we can also create a buy position at this point.
  • A trader is always in a position, buy position is closed and a short position is created and again the short position is closed and a buy position is created.
  • In live trading, a trader need to close the trade and enter the reverse trade by always sending double quantity order in the system.
  • As an example suppose we have 75 quantity Nifty futures buy position. To close the buy trade and to enter the short sell trade we need to short sell 150 quantity Nifty. Out of that 150/2 = 75 quantity will close the buy trade and remaining 75 quantity will enter the short sell trade.

Suggested reading

We suggest going through the video course Trailing Exits: Using Average True Range to Set Profit Targets (Wiley Trading Video) by Charles LeBeau.

Conclusion

The ATR Trailing Stops indicator is very price sensitive and creates whipsaws during the range-bound market. During that time the position can be stopped out early. To prevent early exits, this indicator can be used in conjunction with other indicators. We suggest using the ADX/DMS indicator as a supporting indicator. The ADX can measure the trend strength. If it is a strong trend, traders can use the ATR Trailing Stops indicator for entry and exit. On the other hand, if ADX shows a range-bound market we suggest not to use this indicator as traders can lose money both ways then.

Author: Indrajit Mukherjee

Indrajit is a professional blogger and trading system developer. Amibroker expert, Wordpress expert, SEO expert and stock market analyst.Trading since 2002, he has started the journey of StockManiacs.net on 2008. He follows Indian and world stock markets closely.

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