How to Use an Average True Range Trailing Stop
- 1). Pull up the daily price of the stock using a stock charting platform. The charts must provide the high, low and close price for each day over the last 14 days.
- 2). Select the ATR indicator in the charting platform and apply it to the stock price data. Understanding how the ATR works and is calculated is important, even though charting software will do it for you. ATR is an average over time of the Current True Range, or CTR. By setting the ATR period to "1" in the charting platform, you will attain the CTR. Whichever of the following absolute values (no negative numbers) is highest for the current period is the CTR: the current high minus current low, the current high minus close of period prior, or the current low minus close of one period prior.
- 3). Calculate the ATR over 14 periods. This is done by changing the ATR value to "14" in the charting software. Taking an average smooths fluctuations seen in the daily CTR figure. To calculate manually, use the formula: Current ATR = [(Prior ATR x 13) + CTR] / 14.
- 4). Implement ATR as a trailing stop. Once you've entered a trading position, place a trailing stop (available on most brokerage accounts) for a multiple of the ATR figure. For instance, if a stock is purchased at $1.00 and the ATR is calculated as $0.05, you can place a $0.10 trailing stop on the position---in this case, the ATR is multiplied by two to allow for market fluctuations.
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